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Index to Financial Statements

As filed with the Securities and Exchange Commission on September 28, 2018

Securities Act File No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-2

 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.      
Post-Effective Amendment No.      

 

 

GREAT ELM CAPITAL CORP.

(Registrant’s Exact Name as Specified in Charter)

 

 

800 South Street, Suite 230

Waltham, Massachusetts 02453

(Address of Principal Executive Offices)

(617) 375-3006

(Registrant’s Telephone Number, including Area Code)

Peter A. Reed

Chief Executive Officer and President

Great Elm Capital Corp.

800 South Street, Suite 230

Waltham, Massachusetts 02453

(Name and Address of Agent for Service)

 

 

COPIES TO:

 

Rory T. Hood
Jones Day
250 Vesey Street
New York, New York 10281
(212) 326-3939
  Thomas J. Friedmann
Matthew J. Carter
Dechert LLP
One International Place
100 Oliver Street
Boston, Massachusetts 02110
(617) 728-7100

 

 

Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.

Check box if any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan.  

It is proposed that this filing will become effective (check appropriate box):

 

when declared effective pursuant to section 8(c).

 

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

Title of Securities Being Registered  

Amount

Being

Registered (1)

 

Proposed
Maximum
Offering Price

Per Unit

 

Proposed
Maximum
Aggregate

Offering Price (1)(2)

  Amount of
Registration
Fee (1)(3)

    % Notes due 20    

  $50,000,000   100%   $50,000,000   $6,225

 

 

(1)

Estimated solely for purposes of calculating the registration fee per Rule 457(a).

(2)

Includes notes that may be issued pursuant to the underwriters’ over-allotment option.

(3)

Prior to the initial filing of this registration statement, $11,102,000 aggregate principal amount of securities remained registered and unsold pursuant to Registration Statement No. 333-221882, which was initially filed on December 4, 2017 and declared effective on January 11, 2018. Pursuant to Rule 457(p), $1,382 of the entire fee of $6,225 required in connection with the initial registration of $50,000,000 aggregate principal amount of securities under this registration statement is being offset against the $7,093 filing fee associated with the unsold securities registered under Registration Statement No. 333-221882, and the additional $4,843 is being paid in connection herewith.

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2018

PROSPECTUS

$            

GREAT ELM CAPITAL CORP.

    % NOTES DUE 20    

 

 

Great Elm Capital Corp. is a specialty finance company that is a closed-end, non-diversified management investment company. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups (JOBS) Act (the “JOBS Act”). Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against risk of capital loss, by investing predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion. We are externally managed by Great Elm Capital Management, Inc. (“GECM”), who provides the administrative and other services necessary for us to operate.

We are offering $            in aggregate principal amount of     % notes due 20     (the “Notes”). The Notes will mature on             , 20     . We will pay interest on the Notes on             ,              ,              and              of each year, beginning             ,             . We may redeem the Notes in whole or in part at any time or from time to time on or after             ,            , at our option, at the redemption price equal to 100% of the aggregate principal amount, plus any accrued and unpaid interest, as discussed under “Description of the Notes—Optional Redemption” in this prospectus. Holders of the Notes will not have the option to have the Notes repaid prior to the stated maturity date. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct unsecured obligations and rank pari passu , or equal, with all outstanding and future unsecured unsubordinated indebtedness issued by us. The Notes will be effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries.

We intend to list the Notes on The Nasdaq Global Market (“Nasdaq”) and we expect trading to commence thereon within 30 days of the original issue date under the trading symbol “            .” The Notes are expected to trade “flat.” This means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not included in the trading price. Currently, there is no public market for the Notes.

An investment in the Notes is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. For example, our debt securities either are, or if rated would be, rated below investment grade by independent rating agencies. Below investment grade securities, which are often referred to as “high yield” or “junk,” are regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. The Notes may be illiquid and difficult to value and typically do not require repayment of principal before maturity, which potentially heightens the risk that we may lose all or part of our investment. Further, our investment in Avanti Communications Group plc ( Avanti ), which represented approximately 21% of our investment portfolio (excluding cash and short-term investments) as of June  30, 2018 and 40% of our total investment income for the six months ended June  30, 2018, has resulted in significant payment-in-kind ( PIK ) interest, which significantly increases our exposure to the aforementioned risks. PIK income represented 34.9% of our total interest income for the six months ended June  30, 2018. Please see Risk Factors—Risks Relating to Our Investments—We may lose all of our investment in Avanti.

 

 

Investing in our securities involves a high degree of risk. See “ Risk Factors ” beginning on page 18 of this prospectus to read about factors you should consider, including the risk of leverage, before investing in the Notes.

This prospectus sets forth concisely important information you should know before investing in the Notes. Please read it and the documents we refer you to carefully in their entirety before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission (the “SEC”). We maintain a website at http://www.greatelmcc.com and we make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through such website. Information on our website is not incorporated or a part of this prospectus. You may also obtain free copies of our annual and quarterly reports and make stockholder inquiries by contacting us at Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, Massachusetts 02453 or by calling us collect at (617) 375-3006. The SEC maintains a website at http://www.sec.gov where such information is available without charge.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per
Note
     Total  

Public Offering Price

   $                    $                

Underwriting Discount and Commissions (sales load)

   $                    $                

Proceeds to us, before expenses (1)

   $                    $                

 

(1)

Before deducting expenses payable by us related to this offering, estimated at $500,000, or approximately $             per Note. See “Underwriting.”

The underwriters may also purchase up to an additional $             aggregate principal amount of the Notes offered hereby, to cover over-allotments, if any, within 30 days of the date of this prospectus. If the underwriters exercise this option in full, the total public offering price would be $                , the total underwriting discount and commissions (sales load) paid by us would be $            , and total proceeds to us, before expenses, would be $            .

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

Delivery of the Notes in book-entry form only through The Depository Trust Company will be made on or about                     , 2018.

 

 

 

Ladenburg Thalmann   Janney Montgomery Scott

This prospectus is dated                    , 2018.


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Index to Financial Statements

TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii  

PROSPECTUS SUMMARY

     1  

SELECTED CONSOLIDATED FINANCIAL DATA

     10  

SPECIFIC TERMS OF THE NOTES AND THE  OFFERING

     12  

RISK FACTORS

     18  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

     50  

USE OF PROCEEDS

     51  

CAPITALIZATION

     52  

RATIOS OF EARNINGS TO FIXED CHARGES

     53  

SENIOR SECURITIES

     54  

DESCRIPTION OF THE NOTES

     55  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     67  

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT  MARKET RISK

     85  

THE COMPANY

     86  

MANAGEMENT

     115  

RELATED PARTY TRANSACTIONS AND CERTAIN  RELATIONSHIPS

     126  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

     127  

DETERMINATION OF NET ASSET VALUE

     129  

DIVIDEND REINVESTMENT PLAN

     131  

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX  CONSIDERATIONS

     133  

DESCRIPTION OF OUR COMMON STOCK

     137  

UNDERWRITING

     146  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING  AGENT AND REGISTRAR

     151  

LEGAL MATTERS

     151  

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     151  

WHERE YOU CAN FIND MORE INFORMATION

     151  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

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ABOUT THIS PROSPECTUS

You should read this prospectus carefully before you invest in the Notes. This prospectus and the exhibits to the registration statement to which this prospectus relates contain the terms of the Notes we are offering. It is important for you to read and consider all of the information contained in this prospectus before making your investment decision. See “Where You Can Find More Information” in this prospectus.

You should rely only on the information contained in this prospectus. We and the underwriters have not authorized any other person to provide you with additional information, or with information different from that contained in this prospectus. We and the underwriters take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give to you. We and the underwriters are not making an offer to sell the Notes in any jurisdiction where the offer or sale is not permitted. This prospectus does not constitute an offer to sell or a solicitation of any offer to buy any security other than the securities to which it relates. You should assume that the information appearing in this prospectus is accurate only as of the date on its front cover. Our business, financial condition, results of operations and prospects may have changed since such date. To the extent required by law, we will amend or supplement the information contained in this prospectus. We encourage you to consult your own counsel, accountant and other advisors for legal, tax, business, financial and related advice regarding an investment in our securities.

The terms “we,” “us,” “our,” “the Company” and “GECC” in this prospectus refer to Great Elm Capital Corp., a Maryland corporation, and its subsidiaries for the periods after our consummation of the formation transactions (as described under “The Company—Formation Transactions and Merger,” the “Formation Transactions”) and the merger of Full Circle Capital Corporation with and into us.

 

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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under “Risk Factors” in this prospectus and the other information included in this prospectus and the documents to which we have referred.

Unless otherwise noted, the information contained in this prospectus assumes that the underwriters’ over-allotment option is not exercised.

Great Elm Capital Corp.

Great Elm Capital Corp. is a Maryland corporation that was formed in April 2016 and commenced operations on November 3, 2016 when Full Circle Capital Corporation, a Maryland corporation (“Full Circle”), was merged with and into us (the “Merger”). We operate as a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act. In addition, for tax purposes, we elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our tax year starting October 1, 2016.

Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against risk of capital loss, by investing predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion.

To achieve our investment objectives, we primarily focus on investing in secured and senior unsecured debt instruments in middle-market companies that offer sufficient downside protection but with the opportunity to unlock substantial return potential (interest income plus capital appreciation and fees, if any) that appropriately recognizes potential investment risks.

We target investments that we perceive to be undervalued due to over-leveraging or which operate in industries experiencing cyclical declines and may trade at discounts to their original issue prices. We source these transactions in the secondary markets and occasionally directly with issuers.

We seek to protect against risk of loss by investing in borrowers with tangible and intangible assets, where GECM believes asset values are expected to, or do, exceed our investment and any debt that is senior to, or ranks in parity with, our investment. GECM’s investment process includes a focus on an investment’s contractual documents, as it seeks to identify rights that enhance an investment’s risk protection and avoid contracts that compromise potential returns or recoveries. Although we intend to focus on senior debt instruments of middle-market companies, we may make investments throughout a company’s capital structure, including subordinated debt, mezzanine debt, and equity or equity-linked securities.

Common stock of closed-end investment companies, including BDCs, frequently trade at a discount to their net asset value. Our common stock has historically traded at a discount to our net asset value.

We are generally unable to sell our common stock at a price below net asset value per share. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage. We may, however, sell our common stock at a price below net asset value per share: (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the majority of our stockholders or (3) under such other circumstances as the SEC may permit.



 

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Before the Merger, we acquired a portfolio of fixed income securities (the “Initial GECC Portfolio”) from private investment funds (the “MAST Funds”) managed by MAST Capital Management, LLC, a Delaware limited liability company (“MAST Capital”), a 14-year-old Boston-based middle-market, credit-focused investment manager. The investments included in the Initial GECC Portfolio had a collective fair value of approximately $90.0 million as of June 30, 2016, which represented approximately 26.5%, 24.3% and 5.0%, respectively, of the June 30, 2016 total assets of the three contributing MAST Funds. See “The Company—Formation Transactions and Merger.”

We may be required to hold higher levels of cash, money market funds, or other short-term securities in order to pay our expenses or make distributions to stockholders in the ordinary course of business given the relatively high percentage of our total investment income represented by PIK income. See “Risk Factors—Risks Related to Our Investments—We may hold a significant portion of our portfolio assets in cash, cash equivalents, U.S. government securities, repurchase agreements, money market mutual funds and high quality debt instruments maturing in one year or less, which may have a negative impact on our business and operations.”

Our and GECM’s principal executive offices are currently located at 800 South Street, Suite 230, Waltham, Massachusetts 02453, and our telephone number is (617) 375-3006. We maintain a website located at http://www.greatelmcc.com. Information on our website is not incorporated into or a part of this prospectus.

We are and will remain an “emerging growth company” as defined in the JOBS Act until the earliest of (a) December 31, 2021, (b) the last day of the fiscal year (i) in which we have total annual gross revenue of at least $1.0 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the end of the previous second fiscal quarter, and (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remain an “emerging growth company” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We cannot predict if investors will find our securities less attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active and more volatile trading market for our securities.

Great Elm Capital Management, Inc.

We are managed by GECM, whose investment team has an aggregate of more than 100 years of experience in financing and investing in leveraged middle-market companies. GECM’s team is led by Peter A. Reed. Senior members of GECM’s investment team include Adam M. Kleinman, John S. Ehlinger and Adam W. Yates. The GECM investment team has deployed more than $17.0 billion into more than 550 issuers across 20+ jurisdictions over its 14-year history.

We entered into an investment management agreement with GECM, dated as of September 27, 2016 (the “Investment Management Agreement”), pursuant to which and subject to the overall supervision of our board of directors (our “Board”), GECM provides investment advisory services to GECC. For providing these services, GECM receives a fee from us, consisting of two components: (1) a base management fee and (2) an incentive fee.

The base management fee is calculated at an annual rate of 1.50% based on the average value of our total assets (determined in conformity with generally accepted accounting principles in the United States



 

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(“GAAP”) (other than cash or cash equivalents but including assets purchased with borrowed funds or other forms of leverage)) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.

The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the quarter.

Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined under GAAP) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 1.75% per quarter (7.00% annualized). We pay GECM an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

   

no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate;

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized). We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.1875%) as the “catch-up” provision. The catch-up is meant to provide GECM with 20% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and

 

   

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the quarter.

Any income incentive fee otherwise payable with respect to accrued unpaid income (collectively, the “Accrued Unpaid Income Incentive Fees”) will be deferred, on a security-by-security basis, and will become payable only if, as, when and to the extent cash is received by us or our consolidated subsidiaries in respect thereof. Any accrued unpaid income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such accrued unpaid income will, in the applicable period of reversal, (1) reduce pre-incentive fee net investment income and (2) reduce the amount deferred pursuant to the Investment Management Agreement. Subsequent payments of income incentive fees deferred pursuant to this paragraph do not reduce the amounts payable for any quarter pursuant to the other terms of the Investment Management Agreement.



 

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The following is a graphical representation of the calculation of the income related portion of the incentive fee:

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

(expressed as a percentage of the value of net assets)

 

LOGO

Percentage of pre-incentive fee net investment income

allocated to income related portion of incentive fee

These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.

The second part of the incentive fee, or the “Capital Gains Fee,” is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), commencing with the partial calendar year ended December 31, 2016, and is calculated at the end of each applicable year by subtracting (1) the sum of our and our consolidated subsidiaries’ cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our and our consolidated subsidiaries’ cumulative aggregate realized capital gains, in each case calculated from November 4, 2016. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year.

We will defer cash payment of any incentive fee otherwise payable to GECM in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative Pre-Incentive Fee Net Return (as defined below) during the most recent twelve full calendar quarter period ending on or prior to the date such payment is to be made (the “Trailing Twelve Quarters”) less (2) the aggregate incentive fees that were previously paid to GECM during such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid). “Cumulative Pre-Incentive Fee Net Return” during the relevant Trailing Twelve Quarters means the sum of (a) pre-incentive fee net investment income in respect of such Trailing Twelve Quarters less (b) net realized capital losses and net unrealized capital depreciation, if any, in each case calculated in accordance with GAAP, in respect of such Trailing Twelve Quarters.

See “The Company—Investment Management Agreement—Examples of Quarterly Incentive Fee Calculation” for an example of these calculations.

Pursuant to a separate administration agreement with GECM, dated September 27, 2016 (the “Administration Agreement”), GECM furnishes us with administrative services and we pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under the Administration Agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.



 

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Investment Portfolio

The following tables and graphs summarize information about our portfolio as of June 30, 2018 (dollar amounts in thousands).

 

Investment Type

   Cost      Fair Value  

1 st Lien/Senior Secured Debt

   $ 198,369      $ 185,418  

Equity/Other

     50,805        13,971  
  

 

 

    

 

 

 

Total Long Term Investments

   $ 249,174      $ 199,389  
  

 

 

    

 

 

 

 

LOGO       30-Jun-18  
      Investments
at Fair
Value
    Percentage
of Fair
Value
 
 

Wireless Telecommunications Services

  $ 41,950       21.0
 

Building Cleaning and Maintenance Services

  $ 18,766       9.4
 

Manufacturing

  $ 16,450       8.3
 

Industrial Conglomerates

  $ 14,138       7.1
 

Retail

  $ 13,685       6.9
 

Software Services

  $ 13,646       6.8
 

Technology Services

  $ 13,306       6.7
 

Gaming, Lodging & Restaurants

  $ 9,801       4.9
 

Chemicals

  $ 9,583       4.8
 

Radio Broadcasting

  $ 8,869       4.4
 

Real Estate Services

  $ 7,362       3.7
 

Business Services

  $ 7,291       3.7
 

Water Transport

  $ 6,206       3.1
 

Information and Data Services

  $ 4,841       2.4
 

Oil, Gas & Coal

  $ 4,611       2.3
 

Industrial Other

  $ 3,316       1.7
 

Hotel Operator

  $ 2,574       1.3
 

Consumer Finance

  $ 2,448       1.2
 

Wireless Communications

  $ 275       0.1
 

Grain Mill Products

  $ 237       0.1
 

Maritime Security Services

  $

 

34

 

 

 

   

 

0.0

 

 

   

 

 

   

 

 

 
 

Total

  $ 199,389       100
   

 

 

   

 

 

 

Our investment in Avanti represents 100% of our Wireless Telecommunications Services investments as of June 30, 2018. Please see “Risk Factors—Risks Relating to Our Investments—We may lose all of our investment in Avanti.”

Risk Factors

Investment in our securities involves a number of significant risks relating to our investments and our business and structure that you should consider before investing in our securities.

As of June 30, 2018, Avanti is our largest investment (with a total exposure comprised of two different instruments), representing approximately 21% of our investment portfolio (excluding cash and short-term investments) and 40% of our total investment income for the six months ended June 30, 2018. In December 2017, we agreed to convert all accrued interest in the Avanti third lien senior secured notes (the “Existing Avanti Notes”) through March 31, 2018 into additional shares of Avanti common equity. As of March 31, 2018, we owned $54.1 million in principal amount of Existing Avanti Notes representing approximately 10% of our net asset value. The restructuring closed on April 26, 2018, and we now own approximately 9% of Avanti’s common stock. The conversion of our Existing Avanti Notes to Avanti common stock could result in a significant decrease in our net asset value if the market value of the Avanti common stock were to significantly decrease following the restructuring, a significant decrease in



 

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our total investment income and an increase in the risk of investing in our securities. These factors could also result in lower trading prices for our common stock and/or debt securities. Please see “Risk Factors—Risks Relating to Our Investments—We may lose all of our investment in Avanti.”

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities.

Conflicts of Interest

Certain of our executive officers and directors, and members of the investment committee of GECM, serve or may serve as officers, directors or principals of entities that operate in the same or related lines of business as GECC or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. Further, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers that may in the future become affiliated with Great Elm Capital Group, Inc. (“GEC”). See “Risk Factors—There are significant potential conflicts of interest that could impact our investment returns.”

Although funds managed by GECM may have different primary investment objectives than us, they may from time to time invest in asset classes similar to those we target. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also, from time to time, invest in asset classes similar to those we target. GECM will endeavor to allocate investment opportunities in a fair and equitable manner, and in any event consistent with any duties owed to us and such other funds. Nevertheless, it is possible that we may not be given the opportunity to participate in investments made by investment funds managed by investment managers affiliated with GECM.

We pay management and incentive fees to GECM, and reimburse GECM for certain expenses it incurs. In addition, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.

GECM’s management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds and other forms of leverage) and GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.

The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.

The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, we and GECM each have the right to terminate the agreement without penalty upon 60-days’ written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation. Any material change to the Investment Management Agreement must be submitted to our stockholders for approval under the Investment Company Act, and we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement.



 

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On June 23, 2016, we entered into a subscription agreement with GEC and the MAST Funds (the “Subscription Agreement”), which provides that for so long as either the MAST Funds or GEC beneficially own 35% or more of our outstanding common stock, the MAST Funds and GEC will vote on any proposed changes to the Investment Management Agreement in the same proportion as our unaffiliated stockholders.

As a result of the arrangements described above, there may be times when our management team has interests that differ from those of our stockholders, giving rise to a conflict.

Our stockholders may have conflicting investment, tax and other objectives with respect to their investments in us. The conflicting interests of individual stockholders may relate to or arise from, among other things, the nature of our investments, the structure or the acquisition of our investments, and the timing of disposition of our investments. As a consequence, conflicts of interest may arise in connection with decisions we make, including with respect to the nature or structuring of our investments, that may be more beneficial for one stockholder than for another stockholder, especially with respect to stockholders’ individual tax situations. In selecting and structuring investments appropriate for us, GECM will consider our investment and tax objectives and our stockholders, as a whole, not the investment, tax or other objectives of any stockholder individually.

We may also have conflicts of interest arising out of the investment advisory activities of GECM. GECM may in the future manage other investment funds, accounts or investment vehicles that invest or may invest in assets eligible for purchase by us. To the extent that we compete with entities managed by GECM or any of its affiliates for a particular investment opportunity, GECM will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal investment allocation policies, (2) the requirements of the Investment Advisers Act of 1940 as amended (the “Advisers Act”), and (3) restrictions under the Investment Company Act regarding co-investments with affiliates.

Certain Material U.S. Federal Income Tax Considerations

We currently are a RIC under Subchapter M of the Code for U.S. federal income tax purposes and intend to continue to qualify each year as a RIC. In order to qualify for tax treatment as a RIC, we generally must satisfy certain source-of-income, asset diversification and distribution requirements. As long as we so qualify, we will not be subject to U.S. federal income tax to the extent that we distribute investment company taxable income and net capital gain on a timely basis. If for any taxable year we do not qualify as a RIC, all of our taxable income for that year (including our net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and such distributions would be taxable as ordinary dividends to the extent of our current and accumulated earnings and profits. See “Certain Material U.S. Federal Income Tax Considerations.”

Our Corporate Information

Our offices are located at 800 South Street, Suite 230, Waltham, MA 02453 and our phone number is (617) 375 3006. Our Internet website address is www.greatelmcc.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on our website to be part of this prospectus.

Recent Developments

Dollar amounts are presented in thousands.



 

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In July 2018, we purchased an additional $2,500 par value of Sungard Availability Services Capital, Inc. first lien senior secured term loan at a price of approximately 99% of par value.

In July 2018, we purchased an additional $2,000 par value of Commercial Barge Line Company first lien term loan at a price of approximately 72% of par value.

In July 2018, we purchased $478 par value of PFS Holdings Corp. first lien term loan at a price of approximately 60% of par value.

In July 2018, we exercised all of our RiceBran Technologies Corporation warrants at a price of $1.60 per share in a cashless exercise. This transaction resulted in GECC receiving 139,392 shares. We subsequently sold all of the shares at a weighted average price of $2.43 per share.

In July 2018, in connection with the sale of one of its businesses, DataX, Ltd., The Selling Source, LLC paid down $3,800 of its outstanding $5,689 first lien, senior secured holding. The remainder of the outstanding loan was restructured, with GECC receiving $1,250 of first out term loan bearing interest at a rate of 3-month LIBOR plus 5% which matures on January 13, 2020.

In August 2018, we purchased an additional $2,647 par value of SESAC Holdco II LLC second lien senior secured loan at a price of approximately 99% of par value.

In August 2018, we purchased $2,000 par value of California Pizza Kitchen, Inc. first lien term loan at a price of approximately 98% of par value.

In August 2018, we sold our position in Foresight Energy LP at a price of approximately 100% of par value.

In August 2018, we sold our position in Nana Development Corp. first lien senior secured bond at a price of approximately 100% of par value

In August 2018, we purchased an additional $4,500 of par value of True Taj LLC first lien, Debtor in Possession Note at a price of approximately 104% of par value.

In August 2018, we purchased an additional $8,750 of par value of PFS Holdings Corp. first lien term loan at a price of approximately 60% of par value.

In August 2018, we sold $5,000 of par value of Almonde, Inc. second lien senior secured loan at a price of approximately 98% of par value.

On August 8, 2018, our Board declared the monthly distributions for the fourth quarter of 2018 at an annual rate of approximately 8.4% of our June 30, 2018 net asset value, which equates to $0.083 per month. The schedule of distribution payments is as follows:

 

Month

   Rate      Record Date      Payable Date  

October

   $ 0.083        October 31, 2018        November 15, 2018  

November

   $ 0.083        November 30, 2018        December 14, 2018  

December

   $ 0.083        December 31, 2018        January 15, 2019  


 

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Resale Registration Statement

On September 4, 2018, a post-effective amendment to a registration statement (the “resale registration statement”) relating to the resale from time to time of up to 7,000,268 shares of our common stock by certain selling stockholders identified therein was declared effective by the SEC. On September 14, 2018, private investment funds managed by MAST Capital publicly reported sales of an aggregate of 45,448 shares of our common stock. A significant portion of our total outstanding common stock may be sold into the public market under the resale registration statement at any time, which could cause the market price of our common stock to drop significantly, even if our business is doing well. These sales, or the market perception that the holders of a large number of shares of common stock intend to sell stock, could reduce the market price of our common stock.



 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the year ended December 31, 2017 and for the period from inception through December 31, 2016 is derived from our consolidated financial statements that have been audited by Deloitte & Touche LLP, our independent registered public accounting firm. The selected consolidated financial data for the six months ended June 30, 2018 and 2017 is derived from our unaudited financial data. Interim results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other disclosures included elsewhere in this prospectus.

 

    Six months
ended June 30,
2018
    Six months
ended June 30,
2017
    Year ended
December 31,
2017
    Period from
inception through
December 31,
2016
 
          (Dollar amounts in thousands,
except per share data)
       

Statement of Operations Data:

       

Total Investment Income

  $ 14,660     $ 13,552     $ 29,728     $ 5,831  

Total Gross Expenses

    4,716       5,980       12,153       5,906  

Total Net Expenses

    4,716       5,910       12,153       5,826  

Net Investment Income

    9,944       7,572       17,575       5  

Net Increase (Decrease) in Net Assets Resulting from Operations

    (1,391     912       (2,754     (17,874

Per Share Data (1) :

       

Net Investment Income

    0.93       0.61       1.52       0.28  

Net Increase (Decrease) in Net Assets Resulting from Operations

    (0.13     0.07       (0.24     (0.75

Distributions Declared

    (0.50     (0.50     1.20       0.17  

Statement of Assets and Liabilities Data:

       

Total Assets

  $ 286,630     $ 213,747     $ 239,913     $ 236,544  

Total Liabilities

  $ 161,039     $ 60,045     $ 107,626     $ 63,560  

Total Net Assets

  $ 125,591     $ 153,702     $ 132,287     $ 172,984  

Other Data:

       

Per Share Market Value at the End of the Period

  $ 9.24     $ 10.62     $ 9.84     $ 11.67  

Total Return based on Market Value

    (1.03 )% (2)       (4.78 )% (2)       (5.56 )% (2)       (2.03 )% (3)  

Total Return based on Net Asset Value

    (1.04 )% (2)       1.98 % (2)       0.69 % (2)       (5.30 )% (3)  

 

(1)

The per share data was derived by using the weighted average shares outstanding during the period.

(2)

Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of our common stock. Total return based on net asset value is calculated as the change in net asset value per share, assuming our distributions were reinvested through our dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share, assuming our distributions were reinvested through our dividend reinvestment plan.

(3)

Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of our common stock. Total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment



 

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  plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment plan, and is assumed to have been $12.03 per share on November 4, 2016. $12.03 per share represents the closing price of Full Circle’s common stock on its last day of trading prior to the Merger, as adjusted by the exchange ratio in the Merger Agreement (as defined herein).

The following table sets forth certain quarterly financial data for each of the quarters for the fiscal year ended December 31, 2017, and the first and second quarters of the fiscal year ending December 31, 2018. This data is derived from our unaudited financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.

 

     2018     2017      2016  
     Q2     Q1     Q4      Q3     Q2     Q1      Q4 (1)  
    

(Dollar amounts in thousands,

except per share data)

        

Total investment income

   $ 7,162     $ 7,498     $ 9,710      $ 6,466     $ 6,237     $ 7,315      $ 5,831  

Total expenses before incentive fee

   $ 3,233     $ 2,666     $ 1,667      $ 2,006     $ 1,888     $ 2,203      $ 4,955  

Total incentive fee

   $ (2,149   $ 966     $ 1,610      $ 890     $ 871     $ 1,023      $ 863  

Total gross expenses

   $ 1,084     $ 3,632     $ 3,277      $ 2,896     $ 2,759     $ 3,226      $ 5,818  

Net investment income

   $ 6,078     $ 3,866     $ 6,433      $ 3,570     $ 3,478     $ 4,094      $ 5  

Net increase (decrease) in net assets resulting from operations

   $ 2,648     $ (4,039   $ 5,066      $ (8,732   $ (2,467   $ 3,379      $ (17,874

Net increase in net assets resulting from net investment income per share

   $ 0.57     $ 0.36     $ 0.59      $ 0.32     $ 0.29     $ 0.32      $ 0.00  

Net increase (decrease) in net assets resulting from operations per share

   $ 0.25     $ (0.38   $ 0.47      $ (0.77   $ (0.20   $ 0.27      $ (1.39

 

(1)

Represents the period from inception through December 31, 2016. We began operations on November 3, 2016.



 

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SPECIFIC TERMS OF THE NOTES AND THE OFFERING

This section outlines the specific legal and financial terms of the Notes. You should read this section together with the more general description of the Notes under the heading “Description of the Notes” before investing in the Notes. Capitalized terms used in this prospectus and not otherwise defined shall have the meanings ascribed to them in the indenture governing the Notes.

 

Issuer

Great Elm Capital Corp.

 

Title of the Securities

        % Notes due 20        

 

Initial Aggregate Principal Amount Offered

$                

 

Over-allotment Option

The underwriters may also purchase from us up to an additional $        aggregate principal amount of Notes within 30 days of the date of this prospectus solely to cover over-allotments, if any.

 

Initial Public Offering Price

        % of the aggregate principal amount of Notes.

 

Principal Payable at Maturity

100% of the aggregate principal amount; the principal amount of each Note will be payable on its stated maturity date at the office of the Trustee, Paying Agent, and Security Registrar for the Notes or at such other office in New York, New York as we may designate.

 

Type of Note

Fixed-rate note

 

Interest Rate

        % per year

 

Day Count Basis

360-day year of twelve 30-day months

 

Original Issue Date

                    , 2018

 

Stated Maturity Date

                    , 20        

 

Date Interest Starts Accruing

                    , 2018

 

Interest Payment Dates

Each                 ,                 ,                   and                 , beginning                 ,                 . If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

 

Interest Periods

The initial interest period will be the period from and including,                 , 2018, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.


 

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Regular Record Dates for Interest

Each                 ,                 ,                   and                 , beginning                 ,                 .

 

Specified Currency

United States Dollars

 

Place of Payment

New York, New York and/or such other places that may be specified in the indenture or a notice to holders.

 

Ranking of Notes

The Notes will be our direct unsecured obligations and will rank:

 

   

pari passu , or equal, with our existing and future unsecured indebtedness, including, without limitation, the $32.6 million in aggregate principal amount of 6.50% unsecured notes that mature on September 18, 2022 (the “2022 Notes”) and the $46.4 million in aggregate principal amount of 6.75% unsecured notes that mature on January 31, 2025 (the “2025 Notes”);

 

   

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

   

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries.

 

  Effective subordination means that in any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets.

 

  The indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.

 

Listing

We intend to list the Notes on Nasdaq within 30 days of the original issue date under the symbol “                .”

 

Denominations

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

 

Business Day

Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City are authorized or required by law or executive order to close.


 

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Optional Redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after                 ,                 upon not less than 30 days’ nor more than 60 days’ written notice by mail prior to the date fixed for redemption thereof, at a redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.

 

  You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes.

 

  Any exercise of our option to redeem the Notes will be done in compliance with the Investment Company Act to the extent applicable.

 

  If we redeem only some of the Notes, the Trustee or, with respect to global securities, The Depositary Trust Company (“DTC”) will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture governing the Notes, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed, in such case, to the extent applicable. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

 

Sinking Fund

The Notes will not be subject to any sinking fund.

 

  A sinking fund is a fund established by us by periodically setting aside money for the gradual repayment of a debt. No amounts will be set aside for the express purpose of repayment of principal and any unpaid interest on the Notes, and repayment of the Notes will depend upon our financial condition as of the maturity date of the Notes.

 

Repayment at Option of Holders

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

 

Defeasance

The Notes are subject to defeasance by us.

 

 

“Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions required under the indenture



 

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relating to the Notes, we will be deemed to have been discharged from our obligations under the indenture relating to the Notes. We are under no obligation to exercise any rights of defeasance.

 

Covenant Defeasance

The Notes are subject to covenant defeasance by us.

 

  In the event of a “covenant defeasance,” upon depositing such funds and satisfying conditions similar to those for defeasance, we would be released from certain covenants under the indenture relating to the Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the indenture, and while the Notes could not be accelerated for any reason, the holders of Notes nonetheless would be guaranteed to receive the principal and interest owed to them. We are under no obligation to exercise any rights of covenant defeasance.

 

Form of Notes

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC. See “Description of the Notes—Book-Entry Procedures.”

 

Trustee, Paying Agent, and Security Registrar

American Stock Transfer & Trust Company, LLC

 

Events of Default

You will have rights if an Event of Default occurs with respect to the Notes and is not cured.

 

  The term “Event of Default” in respect of the Notes means any of the following:

 

   

We do not pay the principal of any Note when due and payable.

 

   

We do not pay interest on any Note when due, and such default is not cured within 30 days.

 

   

We remain in breach of any other covenant with respect to the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the Trustee or holders of at least 25% of the principal amount of the Notes.

 

   

We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and in the



 

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case of certain orders or decrees entered against us under any bankruptcy law, such order or decree remains undischarged or unstayed for a period of 90 days.

 

   

If, pursuant to Sections 18(a)(1)(c)(ii) and 61 of the Investment Company Act, or any successor provisions thereto of the Investment Company Act, on the last business day of each of 24 consecutive calendar months, the Notes have an asset coverage (as such term is used in the Investment Company Act) of less than 100%, as such obligation may be amended or superseded but giving effect to any exemptive relief that may be granted to us by the SEC.

 

Other Covenants

In addition to any covenants described elsewhere in this prospectus, the following covenants shall apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate, whether or not we are subject to, Section 18(a)(1)(A) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded but giving effect to any exemptive relief that may be granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the Investment Company Act, equals at least 150% after such borrowings. See “Risk Factors—Risks Relating to Our Business and Structure—Recently enacted legislation permits us to incur additional debt.”

 

   

We agree that for the period of time during which the Notes are outstanding, we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the Investment Company Act) of at least the threshold specified in pursuant to Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded (regardless of whether we are subject thereto), after deducting the amount of such dividend, distribution or purchase price, as the case may be, and giving effect, in each case, (i) to any exemptive relief granted to us by the SEC and (ii) to any no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief)



 

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permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a RIC under Subchapter M of the Code.

 

   

If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the Trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with GAAP.

 

  Notwithstanding the restrictions on indebtedness and dividends described above, the indenture under which the Notes will be issued may not prohibit us from paying distributions to our stockholders if we incur indebtedness in excess of the limits set forth in Sections 61(a)(1) and (2) of the Investment Company Act or any successor provision if we determine that such indebtedness, which may include indebtedness under a bank credit facility, is not a “senior security” for purposes of determining asset coverage under the Investment Company Act.

 

Further Issuances

We have the ability to issue additional debt securities under the indenture with terms different from the Notes and, without consent of the holders thereof, to reopen the Notes and issue additional Notes. If we issue additional debt securities, these additional debt securities could have a lien or other security interest that results in such debt securities being effectively senior to the Notes.

 

Global Clearance and Settlement Procedures

Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of GECC, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

Use of Proceeds

To make investments consistent with our investment objectives and for general corporate purposes. See “Use of Proceeds.”


 

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RISK FACTORS

Investing in our securities involves a number of significant risks. Before you invest in the Notes, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in the Notes. These are not the only risks we face. The risks described below, as well as additional risks and uncertainties presently unknown by us or currently not deemed significant, could negatively affect our business, financial condition and results of operations and the value of the Notes and our ability to perform our obligations under the Notes. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment.

Risk Factors Related to the Notes and the Offering

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

The Notes will not be secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred or may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.

The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes are obligations exclusively of Great Elm Capital Corp. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Although our subsidiaries currently do not have any indebtedness outstanding, they may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which the Notes will be issued contains limited protection for holders of the Notes.

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could

 

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have an adverse impact on your investment in the Notes. The indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

   

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions;

 

   

pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, except that we have agreed that for the period of time during which the Notes are outstanding, we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the Investment Company Act) of at least the threshold specified in pursuant to Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded (regardless of whether we are subject thereto), after deducting the amount of such dividend, distribution or purchase price, as the case may be, and giving effect, in each case, (i) to any exemptive relief granted to us by the SEC and (ii) to any no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a RIC under Subchapter M of the Code;

 

   

sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

   

enter into transactions with affiliates;

 

   

create liens (including liens on the stock of our subsidiaries) or enter into sale and leaseback transactions;

 

   

make investments; or

 

   

create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

Notwithstanding the restrictions on indebtedness and dividends described above, the indenture under which the Notes will be issued may not prohibit us from paying distributions to our stockholders if we incur indebtedness in excess of the limits set forth in Sections 61(a)(1) and (2) of the Investment Company Act or any successor provision if we determine that such indebtedness, which may include indebtedness under a bank credit facility, is not a “senior security” for purposes of determining asset coverage under the Investment Company Act.

In addition, the indenture will not require us to offer to purchase the Notes in connection with a change of control or any other event.

 

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Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes if we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity other than as described under “Description of the Notes—Events of Default.” Any such changes could affect the terms of the Notes.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The indenture under which the Notes will be issued does not contain cross-default provisions. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

An active trading market for the Notes may not develop, which could limit the market price of the Notes or your ability to sell them.

The Notes are a new issue of debt securities for which there currently is no trading market. We intend to list the Notes on Nasdaq within 30 days of the original issue date under the symbol “                .” We cannot assure you that the Notes will be listed or that an active trading market will develop for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters have advised us that they intend to make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion. Accordingly, we cannot assure you that a liquid trading market will develop for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including our current indebtedness, composed of the 2022 Notes and the 2025 Notes, and any future indebtedness to which we may be a party, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders

 

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under other debt that we may incur in the future to avoid being in default. If we breach our covenants under other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the other debt, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because any future credit facilities would likely have customary cross-default provisions, if we have a default under the terms of the Notes, the obligations under any future credit facility may be accelerated and we may be unable to repay or finance the amounts due.

We may be subject to certain corporate-level taxes which could adversely affect our cash flow and consequently adversely affect our ability to make payments on the Notes.

We currently are a RIC under Subchapter M of the Code for U.S. federal income tax purposes and intend to continue to qualify each year as a RIC. In order to qualify for tax treatment as a RIC, we generally must satisfy certain source-of-income, asset diversification and distribution requirements. As long as we so qualify, we will not be subject to U.S. federal income tax to the extent that we distribute investment company taxable income and net capital gain on a timely basis.

We may, nonetheless, be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC. Additionally, should we fail to qualify as a RIC, we would be subject to corporate-level taxes on all of our taxable income. The imposition of corporate-level taxes could adversely affect our cash flow and consequently adversely affect our ability to make payments on the Notes.

A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our securities, if any, could cause the liquidity or market value of the Notes to decline significantly.

Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of Notes of any changes in our credit ratings. We expect the Notes will be rated by Egan-Jones Ratings Company. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agency if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our company, so warrant.

The optional redemption provision may materially adversely affect your return on the Notes.

The Notes are redeemable in whole or in part upon certain conditions at any time or from time to time at our option on or after                 ,                . We may choose to redeem the Notes at times when prevailing interest rates are lower than the interest rate paid on the Notes. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the Notes being redeemed.

Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

 

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Risks Relating to Our Investments

We may lose all of our investment in Avanti.

As of June 30, 2018, Avanti is our largest investment. Our investments in Avanti (with a total exposure comprised of two different instruments) represented approximately 21% of our investment portfolio (excluding cash and short-term investments) at June 30, 2018. As of June 30, 2018, we owned approximately 7.9% of Avanti’s outstanding debt and approximately 9% of Avanti’s outstanding common stock. We acquired our original position in Avanti as part of the Initial GECC Portfolio, which we purchased from the MAST Funds prior to the Merger.

On July 7, 2016, Avanti announced that under certain circumstances it may not have access to sufficient liquidity to meet its funding requirements through the second quarter of 2017. On July 11, 2016, Avanti announced the undertaking of a strategic review to consider all financial and strategic options, including a sale of the company pursuant to the City Code on Takeovers and Mergers (the “City Code”). Following these announcements, on July 14, 2016, Moody’s downgraded the Existing Avanti Notes.

On September 16, 2016, Avanti announced that it was launching a consent solicitation process to facilitate paying the October 1, 2016 coupon on the Existing Avanti Notes in kind in lieu of cash. In order to further support the strategic review process, Avanti also announced that it had entered into binding agreements with certain suppliers to defer approximately $39.0 million of capital expenditure payments to the third quarter of fiscal 2017.

On October 17, 2016, Avanti announced the completion of its consent solicitation process with respect to the Existing Avanti Notes, receiving consents from the holders of 89.5% of the Existing Avanti Notes to permit paying the interest due on October 1, 2016 with respect to consenting holders’ Existing Avanti Notes in the form of additional Existing Avanti Notes in lieu of cash. Because Avanti failed to obtain consent from at least 90% of the holders of the Existing Avanti Notes, it was required to pay $3.39 million of the October coupon in the form of cash rather than additional notes.

On December 20, 2016, Avanti announced the completion of its strategic review, which included termination of the formal sale process and the end of the offer period (in each case as defined under the City Code), as well as the launch of a consent solicitation, exchange offer and new money offer as part of a larger financial restructuring of the Existing Avanti Notes.

On January 6, 2017, Avanti announced that it had received consents from holders of 91.85% of the Existing Avanti Notes in connection with the consent solicitation to permit, among other things, the incurrence of up to $132.5 million in super-senior indebtedness and the payment of PIK interest on the Existing Avanti Notes in lieu of cash for certain future interest payments due on the Existing Avanti Notes.

On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to permit, among other things, the incurrence of up to $132.5 million in super senior indebtedness and the payment of PIK interest on the Existing Avanti Notes in lieu of cash for certain future interest payments due on the Existing Avanti Notes, (2) offer to holders of Existing Avanti Notes the opportunity to purchase up to $132.5 million aggregate principal amount of the Avanti second lien senior secured notes (the “PIK Toggle Notes”) (the “New Money Offer”) and (3) offer to holders participating in the New Money Offer to exchange a portion of their Existing Avanti Notes for additional PIK Toggle Notes. Holders who elected to backstop the New Money Offer also received their pro rata share of additional common equity issued by Avanti in an aggregate amount equal to 9.09% of Avanti’s total outstanding stock.

Through completion of the consent solicitation and the New Money Offer, Avanti received $80.0 million of new cash funding, with an additional $50.0 million of funding available on a delayed draw basis, and had the ability to defer up to $112.0 million of future interest payments through April 2018.

 

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We took part in the refinancing, exchanging $22.9 million of Existing Avanti Notes for new PIK Toggle Notes and purchasing an additional $9.2 million of PIK Toggle Notes for $8.9 million of funded cash. At the completion of the refinancing, we continued to hold $47.2 million of Existing Avanti Notes and had committed to provide $5.6 million in additional financing, subject to certain conditions. Additionally, as part of the refinancing, our Chief Executive Officer and representatives of two other significant creditors joined Avanti’s board of directors.

In June 2017, Avanti announced that it had entered into a $100 million three year super-senior facility with HPS Investment Partners, LLC. The proceeds of the super-senior facility replaced an existing, undrawn $50 million debt facility, including the $5.6 million unfunded commitment held by us, and provided additional liquidity to fund the construction and launch of Avanti’s HYLAS 4 satellite. Following Avanti’s entry into this new super-senior facility, our PIK Toggle Notes became third lien notes and the Existing Avanti Notes became second lien notes.

In August 2017, David Williams stepped down as chief executive officer of Avanti and was replaced by Alan Harper, a non-executive director of Avanti, on an interim basis. In April 2018, Kyle Whitehill joined Avanti as its new chief executive officer and Alan Harper resumed his prior role as non-executive director.

In December 2017, we and other holders of the PIK Toggle Notes and the Existing Avanti Notes entered into a restructuring agreement with Avanti. Under that agreement, among other things:

 

   

the Existing Avanti Notes would be converted into common stock of Avanti. All of the outstanding Existing Avanti Notes, if converted, would represent approximately 92% of the pro forma common stock of Avanti, and our Existing Avanti Notes would represent approximately 9.1% of the pro forma common stock of Avanti; and

 

   

the cash interest rate on the PIK Toggle Notes would be reduced from 10% to 9% and the PIK interest rate would be reduced from 15% to 9% on the PIK Toggle Notes, the maturity date would be extended by one year to October 1, 2022 and Avanti would be permitted to issue up to $30 million of indebtedness that ranks equal with or junior to the PIK Toggle Notes and would be provided with relaxed financial covenants, including the elimination of certain financial maintenance covenants.

The restructuring closed on April 26, 2018, and we now own approximately 9% of Avanti’s common stock. Completion of the restructuring was subject to a number of conditions, including approval of a scheme of arrangement by a United Kingdom court and a corresponding proceeding under Chapter 15 of the United States Bankruptcy Code. Aspects of the restructuring were subject to Avanti stockholder approval, including, among other things, the issuance of Avanti stock in the Existing Avanti Notes conversion, and Avanti bondholder approval. Holders of the Existing Avanti Notes considered and approved a scheme of arrangement on March 20, 2018, which was subsequently sanctioned by a United Kingdom court at a hearing on March 26, 2018. Avanti stockholders voted to approve of the issuance of Avanti stock in the conversion at a general company meeting in April 2018. Equity securities expose us to additional risks should Avanti default on its debt or need additional financing. Equity securities rank lower in the capital structure and would likely not pay current income or PIK income, which we had been receiving on our investment in Avanti. Please see, “—We are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments” and “—Our investments are very risky and highly speculative, and the lower middle-market companies we target may have difficulty accessing the capital markets to meet their future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.”

 

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Following the restructuring, Avanti may seek to raise up to an additional $30 million from the sale of its common stock, additional PIK Toggle Notes or other securities that rank equal with or are junior to the PIK Toggle Notes.

Avanti is highly leveraged. If there is an event of default under the indenture governing the PIK Toggle Notes and the obligations under the PIK Toggle Notes are accelerated, Avanti likely will not have sufficient liquidity to pay the obligations under the PIK Toggle Notes. Under such circumstances, Avanti may consider other restructuring options, such as entering into an insolvency procedure under English law or by filing for Chapter 11 protection under the United States Bankruptcy Code, the consequences of which could include a reduction in the value of the assets available to satisfy the PIK Toggle Notes and the imposition of costs and other additional risks on holders of the PIK Toggle Notes, including a material reduction in the value of the PIK Toggle Notes. In such an event, we may lose all or part of our investment in Avanti.

The long-term impact of this refinancing transaction on Avanti’s financial condition is uncertain and cannot be predicted. The refinancing transaction did not materially change Avanti’s long term capital structure and it is unclear whether the refinancing transaction addresses the longer term sustainability of Avanti’s business model. We may sell at a loss all or a portion of our investment in Avanti from time to time in order to meet diversification requirements under the Code or as part of our portfolio management strategy.

We are currently receiving PIK interest on our Avanti investment under the PIK Toggle Notes. As part of the restructuring, the PIK Toggle Notes became pay-if-you-can (PIYC) notes whereby Avanti is required to make interest payments in cash, subject to satisfying certain minimum cash thresholds. Otherwise, the interest will be paid as PIK interest. Such PIK interest exposes us to significant risks. Please see “—Risks Relating to Our Business and Structure—We may expose ourselves to risks associated with the inclusion of non-cash income prior to receipt of cash,” and “—Risks Relating to Our Business and Structure—We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income.” Additionally, all accrued interest (through March 31, 2018) on our Existing Avanti Notes has been converted into additional shares of Avanti common equity and both the cash and PIK interest rates on the PIK Toggle Notes have been reduced. The December 2017 restructuring could result in a significant decrease in our net asset value if the market value of the Avanti common stock that we received in the restructuring significantly decreases following the restructuring, a significant decrease in our total investment income and an increase in the risk of investing in the Notes. These factors could also result in lower trading prices for our common stock and/or debt securities, including the Notes. Notwithstanding the risks associated with the December 2017 restructuring, we believe the value of the Avanti common stock we received in exchange for the Existing Avanti Notes was substantially equal to the value of the Existing Avanti Notes (including accrued PIK interest) converted in the restructuring. There can be no certainty in this respect and a significant decrease in the market value of the Avanti common stock we received in the restructuring could ultimately have a material adverse effect on our net asset value and the trading prices of our securities, and increase the risks of investing in the Notes.

We face increasing competition for investment opportunities. Limited availability of attractive investment opportunities in the market could cause us to hold a larger percentage of our assets in liquid securities until market conditions improve.

We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and small business investment companies), as well as traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors have a lower cost of capital and access to funding sources that are

 

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not available to us, including from the Small Business Administration. In addition, increased competition for attractive investment opportunities allows debtors to demand more favorable terms and offer fewer contractual protections to creditors. Some of our competitors have higher risk tolerances or different risk assessments than we do. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in lower middle-market companies is underserved by traditional commercial banks and other financing sources. A significant increase in the number and/or the size of our competitors in this target market would force us to accept less attractive investment terms. GECM may, at its discretion, decide to pursue such opportunities if it believes that they are in our best interest; however, GECM may decline to pursue available investment opportunities that, although otherwise consistent with our investment policies and objectives, in GECM’s view present unacceptable risk/return profiles. Under such circumstances, we may hold a larger percentage of our assets in liquid securities until market conditions improve in order to avoid having assets remain uninvested. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the Investment Company Act imposes on us as a BDC. We believe that competitors will make first and second lien loans with interest rates and returns that are lower than the rates and returns that we target. Therefore, we do not seek to compete solely on the interest rates and returns offered to potential portfolio companies.

Changes in the regulatory framework under which the wireless telecommunications industry operates and significant competition in the wireless telecommunications industry could adversely affect our business prospects or results of operations.

We hold a large position in Avanti. As a result of our stake in Avanti, we are exposed to risks associated with the wireless telecommunications sector.

For example, Avanti’s operations are regulated by various foreign governments and international bodies. These regulatory regimes restrict or impose conditions on Avanti’s ability to operate in designated areas and to provide specified products or services. In addition, new laws or regulations or changes to the existing regulatory framework could impose additional costs, impair revenue opportunities and potentially impede Avanti’s ability to provide services. The further regulation of Avanti’s activities could impact Avanti’s ability to compete in the marketplace and limit the return Avanti, and, as a result, we, can expect to achieve.

In addition, Avanti’s business may also be affected by the significant competition in the wireless telecommunications industry. There is rapid development of new technologies, services and products, which brings new competitors to the market. While these changes have enabled companies like Avanti to offer new types of products and services, they have also allowed other providers to broaden the scope of their own competitive offerings. Avanti’s ability to compete effectively will depend on, among other things, how successfully Avanti anticipates and responds to various factors affecting its industry, including new technologies and business models, changes in consumer preferences and demand for existing services, demographic trends and economic conditions. If Avanti is not able to respond successfully to these competitive challenges, Avanti may face challenges in meeting its required payments under its debt securities held by us, which could result in a material decrease in the fair value of such debt securities, and a corresponding material adverse change in our financial position and results of operations.

 

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Our portfolio will be limited in diversification among portfolio companies which may subject us to a risk of significant loss if one or more of these companies defaults on its obligations under any of its debt instruments.

Our portfolio is likely to hold a limited number of portfolio companies. Beyond the asset diversification requirements associated with qualification as a RIC, we do not have fixed guidelines for diversification, and our investments are likely to be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some funds, we are more susceptible to failure if a single investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.

Our portfolio will be concentrated in a limited number of industries, which subjects us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

Our portfolio is likely to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact our aggregate realized returns.

In addition, we may from time to time invest a relatively significant percentage of our portfolio in industries in which GECM does not necessarily have extensive historical research coverage. If an industry in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

Any unrealized losses we experience in our portfolio may be an indication of future realized losses, which could reduce our income available for distribution.

As a BDC, we are required to carry our investments at fair value as determined in good faith by our Board. Decreases in the fair values of our investments are recorded as unrealized depreciation. Any unrealized losses in our portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.

Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our returns on equity.

We are subject to the risk that investments intended to be held over long periods are, instead, repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, repay debt or repurchase our common stock, depending on expected future investment opportunities. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed by them.

We are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

We generally do not hold controlling equity positions in our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments

 

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that we typically hold in our portfolio companies, we may not be able to dispose of our investments if we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.

Defaults by our portfolio companies may harm our operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of our investments and foreclosure on our secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of financial covenants, with a defaulting portfolio company. If any of these occur, it could materially and adversely affect our operating results and cash flows.

By investing in companies that are experiencing significant financial or business difficulties, we will be exposed to distressed lending risks.

As part of our lending activities, we may purchase notes or loans to companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although the terms of such financing may result in significant financial returns to us, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful financing to companies experiencing significant business and financial difficulties is unusually high. We cannot assure you that we will correctly evaluate the value of the assets collateralizing our investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a portfolio company, we may lose all or part of the amounts advanced to the borrower or may be required to accept collateral with a value less than the amount of the investment advanced by us to the borrower.

As of June 30, 2018, we held approximately $16.0 million at par value of TRU Taj LLC (“TRU Taj”) senior secured notes due 2021 and $1.7 million at par value of TRU Taj debtor in possession notes, which represented approximately 4.9% of our total assets at market value as of such date. Toys “R” Us, Inc. (“Toys”), the parent company of TRU Taj, announced a plan of restructuring that includes store closures in the U.S., the winding down of certain subsidiary operations, and potential insolvency proceedings for certain subsidiaries of TRU Taj. TRU Taj has also announced that it has commenced a sale of substantially all of its assets. On August 6, 2018, TRU Taj filed cleansing materials providing additional information around the ongoing sale process of its equity interest in an Asia joint venture (the “Asia JV”). A credit bid submitted by an ad hoc group of noteholders in an amount of up to $760 million (net of any cash, debt and working capital adjustments) for the approximately 85% of the Asia JV owned by TRU Taj represented the highest bid received and met most closely Toys’ criteria for certainty of closing. At this time, no definitive agreement or plan has been entered into or settled. However, if consummated, such reorganization could have a material adverse impact on our net investment income.

Our investments are very risky and highly speculative, and the lower middle-market companies we target may have difficulty accessing the capital markets to meet their future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.

Senior Secured Loans and Notes . There is a risk that the collateral securing our loans and notes may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio

 

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company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan or note. Consequently, the fact that a loan or note is secured does not guarantee that we will receive principal and interest payments according to the loan’s or note’s terms, or at all, or that we will be able to collect on the loan or note should we be forced to enforce our remedies.

Mezzanine Loans . Our mezzanine debt investments will be generally subordinated to senior loans and will be generally unsecured. As such, other creditors may rank senior to us in the event of an insolvency, which could likely result in a substantial or complete loss on such investment in the case of such insolvency. This may result in an above average amount of risk and loss of principal.

Unsecured Loans and Notes . We may invest in unsecured loans and notes. If the issuer defaults or has an event of insolvency, other creditors may rank senior, be structurally senior or have lien protection that effectively renders their claim superior to our rights under our unsecured notes or loans, which could likely result in a substantial or complete loss on such investment in the case of such insolvency. This may result in an above average amount of risk and loss of principal.

Equity Investments . When we invest in senior secured loans or mezzanine loans, we may acquire equity securities, including warrants, as well. In addition, we may invest directly in the equity securities of portfolio companies. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

In addition, investing in middle-market companies involves a number of significant risks, including:

 

   

these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;

 

   

they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

   

they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on you;

 

   

they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and GECM may be named as defendants in litigation arising from our investments in the portfolio companies;

 

   

they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity; and

 

   

a portion of our income may be non-cash income, such as contractual PIK interest, which represents interest added to the debt balance and due at the end of the instrument’s term, in the case of loans, or issued as additional notes in the case of bonds. Instruments bearing PIK interest typically carry higher interest rates as a result of their payment deferral and increased credit risk. When we recognize income in connection with PIK interest, there is a risk that such income may become uncollectable if the borrower defaults.

 

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Investing in middle-market companies involves a high degree of risk and our financial results may be affected adversely if one or more of our portfolio investments defaults on its loans or notes or fails to perform as we expect.

Our portfolio consists primarily of debt and equity investments in privately owned lower middle-market companies. Investing in lower middle-market companies involves a number of significant risks. Typically, the debt instruments in which we invest are not initially rated by any rating agency; however, we believe that if such investments were rated, they would be below investment grade, which are referred to as “junk bonds.” Compared to larger publicly owned companies, these middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic downturns and other business disruptions. Typically, these companies need more capital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face intense competition from larger companies with greater financial, technical and marketing resources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons. Therefore, the loss of any of their key employees could affect a portfolio company’s ability to compete effectively and harm its financial condition. Further, some of these companies conduct business in regulated industries that are susceptible to regulatory changes. These factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These events could limit a portfolio company’s ability to repay its obligations to us. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the value of the loan’s collateral and the fair market value of the loan.

Most of the loans in which we invest are not structured to fully amortize during their lifetime. In order to create liquidity to pay the final principal payment, borrowers typically must raise additional capital or sell their assets, which could potentially result in the collateral being sold for less than its fair market value. If they are unable to raise sufficient funds to repay us, the loan will go into default, which will require us to foreclose on the borrower’s assets, even if the loan was otherwise performing prior to maturity. This will deprive us from immediately obtaining full recovery on the loan and prevent or delay the reinvestment of the loan proceeds in other, more profitable investments. Moreover, there are no assurances that any recovery on such loan will be obtained. Most of these companies cannot obtain financing from public capital markets or from traditional credit sources, such as commercial banks. Accordingly, loans made to these types of companies pose a higher default risk than loans made to companies that have access to traditional credit sources.

An investment strategy that includes privately held companies presents challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

We will invest in privately held companies. Generally, little public information exists about these companies, and we are required to rely on GECM’s ability to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger competitors. These factors could adversely affect our investment returns as compared to companies investing primarily in the securities of public companies.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or in some cases senior to, the debt in which we invest. By their terms, such debt instruments may entitle

 

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the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invested. Also, in insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Even though we may have structured investments as secured investments, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securing such subordinated claim to the bankruptcy estate. The principles of equitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior investment is re-characterized as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business.

Second priority liens on collateral securing loans and notes that we invest in may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

We may purchase loans or notes that are secured by a second priority security interest in the same collateral pledged by a portfolio company to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders. Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secured debt without the senior lender’s consent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it will control the disposition of any collateral in the event of bankruptcy or other default. In many such cases, the senior lender will require us or the indenture trustee to enter into an “intercreditor agreement” prior to permitting the portfolio company to borrow. Typically the intercreditor agreements expressly subordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings; (3) the amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans and notes.

The reference rates for our loans may be manipulated or change.

Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (the “BBA”) in connection with the calculation of the London Interbank Offered Rate (“LIBOR”) across a range of maturities and currencies may have been underreporting or otherwise

 

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manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

Central banks have engaged in quantitative easing, currency purchase programs and other activities that caused government borrowing rates and currencies to trade at prices different than those that would prevail in an unaffected market.

Actions by market participants, like the BBA, or by government agencies, like the Federal Reserve Board, may affect prevailing interest rates and the reference rates for loans to our portfolio companies. Actions by governments may create inflation in asset prices that over-state the value of our portfolio companies and their assets and drive cycles of capital market activities (like mergers and acquisitions) at a rate and at prices in excess of those that would prevail in an unaffected market.

We cannot assure you that actions by market participants, like the BBA, or by government agencies, like the Federal Reserve Board, will not materially adversely affect trading markets or our portfolio companies or us or our and our portfolio companies’ respective business, prospects, financial condition or results of operations.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.

We may mismatch the interest rate and maturity exposure of our assets and liabilities.

Our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. We cannot assure you that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which could reduce our net investment income. We expect that our fixed-rate investments will be financed primarily with equity and/or long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the Investment Company Act. If we implement these techniques properly, we could experience losses on our hedging positions, which could be material.

If interest rates fall, our portfolio companies are likely to refinance their obligations to us at lower interest rates. Our proceeds from these refinancings are likely to be reinvested at lower interest rates than our refinanced loans resulting in a material decrease in our net investment income.

We may not realize gains from our equity investments.

Our portfolio may include warrants or other equity securities. We may take back equity securities in exchange for our debt investments in workouts of troubled investments. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. The equity interests we invest in may not appreciate in value and, in fact, may

 

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decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may seek puts or similar rights to give it the right to sell our equity securities back to the portfolio company. We may be unable to exercise these put rights if the issuer is in financial distress or otherwise lacks sufficient liquidity to purchase the underlying equity investment.

Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy contemplates investments in debt securities of foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Such investments will generally not represent “qualifying assets” under Section 55(a) of the Investment Company Act. Pursuant to the Investment Company Act, qualifying assets must represent at least 70% of our total assets at the time of acquisition of any additional non-qualifying assets. If we do not meet the 70% threshold, we will be limited to purchasing qualifying assets until such threshold is met. See “The Company—Regulation as a Business Development Company.”

Any investments denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we offer no assurance that we will, in fact, hedge currency risk, or that if it does, such strategies will be effective.

We may hold a significant portion of our portfolio assets in cash, cash equivalents, money market mutual funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less, which may have a negative impact on our business and operations.

We may hold a significant portion of our portfolio assets in cash, cash equivalents, money market mutual funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less for many reasons, including, among others:

 

   

as part of GECM’s strategy in order to take advantage of investment opportunities as they arise;

 

   

when GECM believes that market conditions are unfavorable for profitable investing;

 

   

when GECM is otherwise unable to locate attractive investment opportunities;

 

   

as a defensive measure in response to adverse market or economic conditions; or

 

   

to meet RIC qualification requirements.

We may also be required to hold higher levels of cash, money market mutual funds or other short-term securities in order to pay our expenses or make distributions to stockholders in the ordinary course of

 

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business given the relatively high percentage of our total investment income represented by PIK income. During periods when we maintain exposure to cash, money market mutual funds or short-term securities, we may not participate in market movements to the same extent that it would if we were fully invested, which may have a negative impact on our business and operations and, accordingly, our returns may be reduced.

Risks Relating to Our Business and Structure

GEC and the MAST Funds collectively own the majority of our outstanding common stock and may attempt to exert control over us in a manner that is adverse to your interests.

GEC and the MAST Funds collectively own the majority of the outstanding shares of our common stock and accordingly may control the results of matters submitted to the vote of our stockholders. Pursuant to the Subscription Agreement, for so long as either the MAST Funds or GEC beneficially own 35% or more of our outstanding common stock, GEC and the MAST Funds will vote their shares proportionately to our other stockholders on certain matters. Although there is no agreement between GEC and the MAST Funds to act in concert with respect to the shares of our common stock they own, funds managed by MAST Capital (including some of the MAST Funds) are a significant stockholder of GEC and Peter A. Reed, our chief executive officer, is chief executive officer and a member of the board of directors of GEC. GEC and the MAST Funds may use their share ownership, ownership of GECM or otherwise exert control over us in a manner that is adverse to your interests.

Capital markets experience periods of disruption and instability. These market conditions have materially and adversely affected debt and equity capital markets in the United States and abroad, which had, and may in the future have, a negative impact on our business and operations.

The global capital markets are subject to disruption as evidenced by, among other things, a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. We cannot provide any assurance that these conditions will not significantly worsen. Equity capital may be difficult to raise because, as a BDC, we are generally not able to issue additional common stock at a price less than net asset value. In addition, our ability to incur indebtedness or issue preferred stock is limited by applicable regulations such that our asset coverage, as defined in the Investment Company Act, must equal at least 150% immediately after each time we incur indebtedness or issue preferred stock. The debt capital that may be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.

Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness, and any failure to do so could have a material adverse effect on our business. The expected illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments.

In addition, significant changes in the capital markets, including the recent extreme volatility and disruption, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition and results of operations.

 

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We may borrow money, which would magnify the potential for loss on amounts invested and may increase the risk of investing with us.

We have existing indebtedness and may in the future borrow additional money, each of which magnifies the potential for loss on amounts invested and may increase the risk of investing with us. Our ability to service our existing and potential future debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we could employ at any particular time will depend on GECM’s and our Board’s assessment of market and other factors at the time of any proposed borrowing.

Any GECC credit facility would impose financial and operating covenants that would restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under the Code. A failure to renew our credit facilities or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. When a company issues debt, the issuer gives the debt holders a call right on the issuer’s business and assets. Holders of such debt securities would have fixed dollar claims on our consolidated assets that would be superior to the claims of our common stockholders or any preferred stockholders.

If the value of our consolidated assets decreases while we have debt outstanding, leveraging would cause our net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our consolidated income while we have debt outstanding would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distributions. We cannot assure you that our leveraging strategy will be successful.

Illustration . The following tables illustrate the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The first table assumes the amount of senior securities outstanding as of June 30, 2018. The second table assumes the amount of senior securities outstanding as permitted under our asset coverage ratio of 150%. See “—Recently enacted legislation permits us to incur additional debt.” The calculations in the tables below are hypothetical and actual returns may be higher or lower than those appearing below.

Table 1

 

Assumed Return on Our Portfolio (net of expenses)

     (10.00 )%      (5.00 )%      0.00     5.00     10.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corresponding net return to common stockholders (1)(2)

     (20.51 )%      (12.57 )%      (4.64 )%      (3.30 )%      (11.23 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Assumes $199.4 million in total portfolio assets as of June 30, 2018, $79.0 million in senior securities outstanding, $125.6 million in net assets as of June 30, 2018, and an average cost of funds of 7.37%. Actual interest payments may be different.

(2)

In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our June 30, 2018 total portfolio assets of at least 2.92%.

 

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Table 2

 

Assumed Return on Our Portfolio (net of expenses)

     (10.00 )%      (5.00 )%      0.00     5.00     10.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corresponding net return to common stockholders) (1)(2)

     (43.45 )%      (28.91 )%      (14.37 )%      0.17     14.71
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Assumes $365.2 million in total portfolio assets as of June 30, 2018, $244.9 million in senior securities outstanding, $125.6 million in net assets as of June 30, 2018, and an average cost of funds of 7.37%. Actual interest payments may be different.

(2)

In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our June 30, 2018 total portfolio assets of at least 4.95%.

We may experience fluctuations in our quarterly results.

Our quarterly operating results will fluctuate due to a number of factors, including the level of expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. Our quarterly operating results will also fluctuate due to a number of other factors, including the interest rates payable on the debt investments we make and the default rates on such investments. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Our success depends on the ability of our investment adviser to attract and retain qualified personnel in a competitive environment.

Our growth requires that GECM retain and attract new investment and administrative personnel in a competitive market. GECM’s ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors, including, but not limited to, its ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, which compete for experienced personnel with GECM, have greater resources than GECM.

Our ability to grow depends on our ability to raise capital and/or access debt financing.

We intend to periodically access the capital markets to raise cash to fund new investments. We expect to continue to elect to be treated as a RIC and operate in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. Among other things, in order to maintain our RIC status, we must distribute to our stockholders on a timely basis generally an amount equal to at least 90% of our investment company taxable income (as defined by the Code), and, as a result, such distributions will not be available to fund new investments. As a result, we must borrow from financial institutions or issue additional securities to fund our growth. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by lenders not to extend credit to us. There has been and will continue to be uncertainty in the financial markets in general. An inability to successfully access the capital or credit markets for either equity or debt could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.

If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the Investment Company Act or our lenders. Any such failure, or a tightening or general disruption of the credit markets, would affect our ability to issue senior securities, including borrowings, and pay dividends or other distributions, which could materially impair our business.

In addition, with certain limited exceptions, effective as of May 4, 2018, we are only allowed to borrow or issue debt securities or preferred stock such that our asset coverage, as defined in the Investment

 

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Company Act, equals at least 150% immediately after such borrowing, which, in certain circumstances, may restrict our ability to borrow or issue debt securities or preferred stock. The amount of leverage that we may employ will depend on GECM’s and our Board’s assessments of market and other factors at the time of any proposed borrowing or issuance of debt securities or preferred stock. We cannot assure you that we will be able to obtain lines of credit at all or on terms acceptable to us.

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

The economy is subject to periodic downturns that, from time to time, result in recessions or more serious adverse macroeconomic events. Our portfolio companies are susceptible to economic slowdowns or recessions and may be unable to repay loans or notes during these periods. Therefore, our non-performing assets may increase and the value of our portfolio may decrease during these periods as we are required to record the market value of our investments. Adverse economic conditions may also decrease the value of collateral securing some of our investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

A portfolio company’s failure to satisfy financial or operating covenants in its agreements with us or other lenders could lead to defaults and, potentially, acceleration of the time when the debt obligations are due and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt that we hold. We may incur additional expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided significant managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

Uncertainty about the financial stability of the United States and of several countries in the European Union and China could have a significant adverse effect on our business, financial condition and results of operations.

Due to federal budget deficit concerns, S&P Global Ratings downgraded the federal government’s credit rating from AAA to AA+ for the first time in history on August 5, 2011. Further downgrades or warnings regarding further downgrades by S&P Global Ratings or other rating agencies, and the United States government’s credit and deficit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock.

Protectionism, other governmental causes of recessions and other negative economic factors may increase. Risks resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial institutions. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and defaults on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy. To the extent uncertainty regarding the United Kingdom or the European Union negatively impacts consumer

 

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confidence, market conditions and credit factors, our business, financial condition and results of operations could be materially adversely affected.

In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities. It is unclear what effect, if any, the conclusion of the Federal Reserve’s bond-buying program has had or will have on the value of our investments. However, it is possible that, without quantitative easing by the Federal Reserve, these developments, along with the United States government’s credit and deficit concerns and the European sovereign debt crisis, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. The target range for the federal funds rate may increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In June 2018, the Federal Reserve increased the federal funds rate to 2.00% and indicated further increases in the future subject to economic conditions.

In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from a continued sell-off of stock trading in Chinese markets. In August 2015, Chinese authorities sharply devalued China’s currency. These market and economic disruptions affected, and these or similar market and economic disruptions may in the future affect, the U.S. capital markets, which could adversely affect our business.

In June 2016, the United Kingdom voted to leave the European Union. It is not possible to ascertain the precise impact these events may have on us from an economic, financial or regulatory perspective but any such impact could have material adverse consequences for us or our portfolio companies.

The U.S. Congress has passed, and the President signed into law on December 22, 2017, a tax reform bill that, among other things, significantly changed the taxation of business entities (including by significantly lowering corporate tax rates), the deductibility of interest expense, and the timing in which certain income items are recognized. Additionally, the Trump administration has called for significant change to U.S. trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or Trump administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.

Changes in tax laws, including recently enacted U.S. tax reform legislation, could have a negative effect on us.

Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including new tax rates, immediate expensing of certain capital expenses and significant limitations on deductibility of

 

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interest. This legislation could have significant effects on us and on an investment in the Notes, some of which may be adverse. The magnitude of the net impact remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the Internal Revenue Service (the “IRS”).

We may acquire other funds, portfolios of assets or pools of debt and those acquisitions may not be successful.

We may acquire other funds, portfolios of assets or pools of debt investments. Any such acquisition program has a number of risks, including among others:

 

   

management’s attention will be diverted from running our existing business by efforts to source, negotiate, close and integrate acquisitions;

 

   

our due diligence investigation of potential acquisitions may not reveal risks inherent in the acquired business or assets;

 

   

we may over-value potential acquisitions resulting in dilution to you, incurrence of excessive indebtedness, asset write downs and negative perception of our common stock;

 

   

stockholder’s interest in GECC may be diluted by the issuance of additional common stock or preferred stock;

 

   

entities affiliated with MAST Capital Management, LLC may control the outcome of the vote on issuance of additional shares of our common stock;

 

   

we may borrow to finance acquisitions, and there are risks associated with borrowing as described in this prospectus;

 

   

GECM has an incentive to increase our assets under management in order to increase its fee stream, which may not be aligned with your interests;

 

   

we and GECM may not successfully integrate any acquired business or assets; and

 

   

GECM may compensate the existing managers of any acquired business or assets in a manner that results in the combined company taking on excessive risk.

Our failure to maintain our status as a BDC would reduce our operating flexibility.

We have elected to be regulated as a BDC under the Investment Company Act. The Investment Company Act imposes numerous constraints on the operations of BDCs and their external advisers. For example, BDCs are required to invest at least 70% of their gross assets in specified types of securities, primarily in private companies or illiquid U.S. public companies below a certain market capitalization, cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the Investment Company Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our voting securities (as defined under the Investment Company Act), we may elect to withdraw our status as a BDC. If we decide to withdraw our BDC election, or if we otherwise fail to qualify, or to maintain our qualification, as a BDC, we may be subject to substantially greater regulation under the Investment Company Act as a closed-end management investment company. Compliance with such regulations would significantly decrease our operating flexibility and would significantly increase our costs of doing business.

Regulations governing our operations as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, referred to collectively as “senior securities,” up to the maximum amount permitted under

 

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the Investment Company Act. Under the provisions of the Investment Company Act applicable to BDCs, we are permitted to issue senior securities (e.g., notes and preferred stock) in amounts such that our asset coverage ratio, as defined in the Investment Company Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.

Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our Board has the authority to modify or waive our investment objectives, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of the Notes.

We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income.

For U.S. federal income tax purposes, we may be required to include in income certain amounts before our receipt of the cash attributable to such amounts, such as original issue discount (“OID”), which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. For example, such OID or increases in loan balances as a result of PIK interest will be included in income before we receive any corresponding cash payments. Also, we may be required to include in income other amounts that we will not receive in cash, including, for example, non-cash income from PIK securities, deferred payment securities and hedging and foreign currency transactions. In addition, we intend to seek debt investments in the secondary market that represent attractive risk-adjusted returns, taking into account both stated interest rates and current market discounts to par value. Such market discount may be included in income before we receive any corresponding cash payments.

Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the U.S. federal income tax requirement to distribute generally an amount equal to at least 90% of our investment company taxable income to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus become subject to additional corporate-level taxes.

However, in order to satisfy the annual distribution requirement for a RIC, we may, but have no current intention to, declare a large portion of a dividend in our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 20% of such dividend) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes.

We may expose ourselves to risks associated with the inclusion of non-cash income prior to receipt of cash.

To the extent we invest in OID instruments, including PIK loans, zero coupon bonds, and debt securities with attached warrants, investors will be exposed to the risks associated with the inclusion of such non-cash income in taxable and accounting income prior to receipt of cash.

 

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The deferred nature of payments on PIK loans creates specific risks. Interest payments deferred on a PIK loan are subject to the risk that the borrower may default when the deferred payments are due in cash at the maturity of the loan. Since the payment of PIK income does not result in cash payments to us, we may also have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations (and thus hold higher cash or cash equivalent balances, which could reduce returns) to pay our expenses or make distributions to stockholders in the ordinary course of business, even if such loans do not default. An election to defer PIK interest payments by adding them to principal increases our gross assets and, thus, increases future base management fees to GECM and, because interest payments will then be payable on a larger principal amount, the PIK election also increases GECM’s future income incentive fees at a compounding rate. The deferral of interest on a PIK loan increases its loan-to-value ratio, which is a measure of the riskiness of a loan.

More generally, market prices of OID instruments are more volatile because they are impacted to a greater extent by interest rate changes than instruments that pay interest periodically in cash. Ordinarily, OID would also create the risk of non-refundable cash payments to GECM, based on non-cash accruals that may never be realized; however, this risk is mitigated since the Investment Management Agreement requires GECM to defer any incentive fees on accrued but unpaid income, the effect of which is that income incentive fees otherwise payable with respect to accrued unpaid income become payable only if, as, when and to the extent cash is received by us or our consolidated subsidiaries in respect thereof.

Additionally, we will be required under the tax laws to make distributions of non-cash income to stockholders without receiving any cash. Such required cash distributions may have to be paid from the sale of our assets without investors being given any notice of this fact. The required recognition of non-cash income, including PIK and OID interest, for U.S. federal income tax purposes may have a negative impact on liquidity, because it represents a non-cash component of our taxable income that must, nevertheless, be distributed in cash to investors to avoid us being subject to corporate level taxation.

Further, our investment in Avanti, which represented approximately 21% of our investment portfolio (excluding cash and short-term investments) as of June 30, 2018 and 40% of our total investment income for the six months ended June 30, 2018, has resulted in significant PIK interest, which significantly increases our exposure to the aforementioned risks. The conversion of the Existing Avanti Notes to equity has resulted in us owning more Avanti common stock which are not expected to generate cash dividends. Please see “—Risks Relating to Our Investments—We may lose all of our investment in Avanti.”

We may expose our self to risks if we engage in hedging transactions.

If we engage in hedging transactions, we may expose our self to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated because we may not be able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged.

Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations

 

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affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.

We will be subject to corporate-level U.S. federal income tax if we are unable to qualify as a RIC under the Code.

No assurance can be given that we will be able to qualify for and maintain RIC tax treatment under the Code. To maintain RIC tax treatment under the Code, we must meet certain annual distribution, source of income and asset diversification requirements.

The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we may use debt financing, we may be subject to asset coverage ratio requirements under the Investment Company Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to make the required distributions, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income tax.

The source of income requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

The asset diversification requirement will be satisfied if we meet asset diversification requirements at the end of each quarter of our taxable year. We expect to satisfy the asset diversification requirements, but our business model calls for concentration in a relatively small number of portfolio companies. Failure to meet the asset diversification requirements could result in us having to dispose of investments quickly in order to prevent the loss of RIC status. Because most of our investments will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses. Further, the illiquidity of our investments may make them difficult or impossible to dispose of in a timely manner.

If we fail to qualify for RIC tax treatment for any reason and become subject to corporate U.S. federal income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.

The incentive fee structure and the formula for calculating the management fee may incentivize GECM to pursue speculative investments, advise us to use leverage when it may be unwise to do so, or advise us to refrain from reducing debt levels when it would otherwise be appropriate to do so.

The incentive fee payable by us to GECM creates an incentive for GECM to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such a compensation arrangement. The incentive fee payable to GECM is calculated based on a percentage of our return on invested capital. In addition, GECM’s base management fee is calculated on the basis of our gross assets, including assets acquired through the use of leverage. This may encourage GECM to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from reducing debt levels when it would otherwise be appropriate to do so. The use of leverage increases our likelihood of default, which would impair the value of our securities. In addition, GECM will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there will be no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, GECM may have a tendency to invest more capital in investments that are likely to result in capital gains

 

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as compared to income producing securities. Such a practice could result in us investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

We may invest in the securities and instruments of other investment companies, including private funds, and we will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to GECM with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear its share of the management and incentive fee payable to GECM, as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.

In addition, if we purchase our debt instruments and such purchase results in our recording a net gain on the extinguishment of debt for financial reporting and tax purposes, such net gain will be included in our pre-incentive fee net investment income for purposes of determining the income incentive fee payable to GECM under the Investment Management Agreement.

Finally, the incentive fee payable by us to GECM also may create an incentive for GECM to invest on our behalf in instruments that have a deferred interest feature, such as investments with PIK provisions. Under these investments, we would accrue the interest over the life of the investment but would typically not receive the cash income from the investment until the end of the term or upon the investment being called by the issuer. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. The portion of the incentive fee that is attributable to deferred interest, such as PIK, will not be paid to GECM until we receive such interest in cash. Even though such portion of the incentive fee will be paid only when the accrued income is collected, the accrued income is capitalized and included in the calculation of the base management fee. In other words, when deferred interest income (such as PIK) is accrued, a corresponding income incentive fee (if any) is also accrued (but not paid) based on that income. After the accrual of such income, it is capitalized and added to the debt balance, which increases our total assets and thus the base management fee paid following such capitalization. If any such interest is reversed in connection with any write-off or similar treatment of the investment, we will reverse the income incentive fee accrual and an income incentive fee will not be payable with respect to such uncollected interest. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of whether GECM met the hurdle rate to earn the incentive fee will become uncollectible.

A general increase in interest rates will likely have the effect of making it easier for GECM to receive incentive fees, without necessarily resulting in an increase in our net earnings.

Given the structure of the Investment Management Agreement, any general increase in interest rates, which are currently near historic lows, will likely have the effect of making it easier for GECM to meet the quarterly hurdle rate for payment of income incentive fees under the Investment Management Agreement without any additional increase in relative performance on the part of GECM. In addition, in view of the catch-up provision applicable to income incentive fees under the Investment Management Agreement, GECM could potentially receive a significant portion of the increase in our investment income attributable to such a general increase in interest rates. If that were to occur, our increase in net earnings, if any, would likely be significantly smaller than the relative increase in GECM’s income incentive fee resulting from such a general increase in interest rates.

 

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GECM has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

GECM has the right, under the Investment Management Agreement, to resign at any time upon not more than 60 days’ written notice, whether we have found a replacement or not. If GECM resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption; our financial condition, business and results of operations, as well as our ability to pay distributions, are likely to be adversely affected; and the market price of our stock may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective and current investment portfolio may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations and cause you to lose your investment.

We incur significant costs as a result of being a publicly traded company.

As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, the Dodd-Frank Act and other rules implemented by our government.

Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.

We and our portfolio companies are subject to applicable local, state and federal laws and regulations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and you, potentially with retroactive effect. Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail our self of new or different opportunities. Such changes could result in material differences to the strategies and plans and may result in our investment focus shifting from the areas of expertise of GECM to other types of investments in which the investment committee may have less expertise or little or no experience. Specifically, tax reform legislation could have an adverse impact on us, the credit markets and our portfolio companies, notwithstanding the reduction in corporate tax rates. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment in us.

In December 2015, the SEC proposed a new rule to regulate the use of derivatives by registered investment companies that applies to BDCs, including us. If the rule goes into effect, it could limit our ability to invest or remain invested in derivatives. In addition, other future regulatory developments may impact our ability to invest or remain invested in derivatives. Legislation or regulation may also change the way in which we are regulated. We cannot predict the effects of any new governmental regulation that may be implemented on our ability to use swaps or any other financial derivative product, and there can be no assurance that any new governmental regulation will not adversely affect our ability to achieve our investment objective.

Recently enacted legislation permits us to incur additional debt.

On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the Small Business Credit Availability Act (the “Act”), was signed into law. The Act amends the Investment Company Act to

 

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permit a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein. This reduction significantly increases the amount of debt that BDCs may incur.

Prior to the enactment of the Act, BDCs were required to maintain an asset coverage ratio of at least 200% in order to incur debt or to issue other senior securities. Generally, for every $1.00 of debt incurred or in senior securities issued, a BDC was required to have at least $2.00 of assets immediately following such incurrence or issuance. For those BDCs that satisfy the Act’s disclosure and approval requirements, the minimum asset coverage ratio is reduced such that for every $1.00 of debt incurred or in senior securities issued, a BDC must now have at least $1.50 of assets.

At our 2018 annual meeting of stockholders, which was held on May 3, 2018 (the “Annual Meeting”), a majority of our stockholders approved the application of the modified minimum asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act, to the Company. As a result of such approval, and subject to satisfying certain ongoing disclosure requirements, effective May 4, 2018 the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, permitting us to incur additional leverage and thereby potentially increasing the risk of an investment in us.

Incurring additional indebtedness could increase the risk in investing in our Company.

Pursuant to the Act, at the Annual Meeting our stockholders approved of the reduction of our required minimum asset coverage ratio from 200% to 150%, permitting us to incur additional leverage. The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities.

As of June 30, 2018, we had approximately $79.0 million of total outstanding indebtedness under two series of senior securities (unsecured notes)—the 2022 Notes and the 2025 Notes—and our asset coverage ratio was 255%. Holders of our 2022 Notes and 2025 Notes have, and holders of the Notes will have, fixed dollar claims on our assets that are superior to the claims of our common stockholders, and such holders may seek to recover against our assets in the event of a default.

If we are unable to meet the financial obligations under any of the 2022 Notes, the 2025 Notes or the Notes, the holders of such indebtedness would have a superior claim to our assets over our common stockholders in the event of a default by us. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make distributions with respect to our common stock. Our ability to service any debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. Moreover, as the base management fee payable to GECM, our investment adviser, is payable based on the average value of our total assets, including those assets acquired through the use of leverage, GECM will have a financial incentive to incur leverage, which may not be consistent with our stockholders’ interests. In addition, our common stockholders bear the burden of any increase in our fees or expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to GECM.

If our asset coverage ratio falls below the required limit, we will not be able to incur additional debt until we are able to comply with the asset coverage ratio applicable to us. This could have a material adverse effect on our operations, and we may not be able to make distributions to stockholders. The actual amount of leverage that we employ will depend on GECM’s and our Board’s assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.

 

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Incurring additional leverage may magnify our exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability.

If we incur additional leverage, including through the offering of Notes hereby, general interest rate fluctuations may have a more significant negative impact on our financial condition and results of operations than they would have absent such additional incurrence, and, accordingly, may have a material adverse effect on our investment objectives and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we may borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these borrowed funds.

We expect that a majority of our investments in debt will continue to be at floating rates with a floor. As a result, significant increase in market interest rates could result in an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. Incurring additional leverage will magnify the impact of an increase to our cost of funds. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. To the extent our additional borrowings are in fixed-rate instruments, we may be required to invest in higher-yield securities in order to cover our interest expense and maintain our current level of return to stockholders, which may increase the risk of an investment in our securities.

There is, and will be, uncertainty as to the value of our portfolio investments.

Under the Investment Company Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us in accordance with our written valuation policy, with our Board having final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Often, there will not be a public market for the securities of the privately held companies in which we invest. As a result, we will value these securities quarterly at fair value based on input from management, third-party independent valuation firms and our Audit Committee, with the oversight, review and approval of our Board. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are subjective and dependent on a valuation process approved and overseen by our Board. Factors that may be considered in determining the fair value of our investments include, among others, estimates of the collectability of the principal and interest on our debt investments and expected realization on our equity investments, as well as external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies and small cap public companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially misstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our securities based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling

 

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securities during a period in which the net asset value understates the value of our investments will receive a lower price for their securities than the value of our investments might otherwise warrant.

Our financial condition and results of operations depend on our ability to effectively manage and deploy capital.

Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, which depends, in turn, on GECM’s ability to identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.

Accomplishing our investment objective on a cost-effective basis is largely a function of GECM’s handling of the investment process, its ability to provide competent, attentive and efficient services and its access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments, GECM may also be called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.

Even if we are able to grow and build out our investment operations, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. Our results of operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions.

We may hold assets in cash or short-term treasury securities in situations where we or GECM expects downward pricing in the high yield market. Our strategic decision not to be fully invested may, from time to time, reduce funds available for distribution and cause downward pressure on the price of our common stock.

The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively.

The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events anticipated or unanticipated in our disaster recovery systems, or a failure in externally provided data systems, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. Our ability to effectively conduct our business could be severely compromised. The financial markets we operate in are dependent upon third-party data systems to link buyers and sellers and provide pricing information.

We depend heavily upon computer systems to perform necessary business functions. Our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we will experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss, respectively.

 

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Terrorist attacks, acts of war or natural disasters may affect the market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition.

Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.

GECM may not be able to achieve the same or similar returns as those achieved by MAST Capital, including as a result of operating under the constraints imposed upon us as a BDC.

MAST Capital’s track record and achievements are not necessarily indicative of future results that will be achieved by GECM. We cannot assure you that we will be able to achieve the results realized by prior investment vehicles managed by MAST Capital.

While senior members of GECM’s investment team have significant experience investing in debt securities of middle-market companies, GECM is a new entity and has limited investment advisory experience managing a BDC. Therefore, GECM may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in our common stock entails more risk than the common stock of a comparable company with a substantial operating history.

GECM’s lack of experience in managing a portfolio of assets under RIC, BDC and Investment Company Act constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.

The Investment Company Act and the Code impose numerous constraints on the operations of registered investment companies, BDCs and RICs that do not apply to the other types of investment vehicles. Moreover, qualification for RIC tax treatment requires satisfaction of certain source-of-income, distribution and asset diversification requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a RIC or could force us to pay unexpected taxes and penalties, which could be material. GECM’s lack of experience in managing a portfolio of assets under such constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.

We are a new company with limited operating history, and GECM has limited investment advisory experience managing a BDC.

We were formed on April 22, 2016 and commenced operations following the closing of the Merger on November 3, 2016. As a BDC, we are subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs under the Investment Company Act and RICs under the Code. GECM has not had any prior experience operating under this regulatory framework, and we may incur substantial additional costs, and expend significant time or other resources, to do so.

We have a limited operating history on which you can evaluate an investment in us or our prior performance. The results of any other funds or clients managed by affiliates of GECM, which have or have had an investment program that is similar to, or different from, our investment program is not indicative of the results that we may achieve. We expect to have a different investment portfolio and may employ different investment strategies and techniques from other funds and clients advised by

 

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affiliates of GECM. Accordingly, our results may differ from and are independent of the results obtained by such other funds and clients. Moreover, past performance is no assurance of future returns. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objective and that the value of our common stock could decline substantially or your investment in us could become worthless.

We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our securities less attractive to investors.

We are and will remain an “emerging growth company,” as defined in the JOBS Act, until the earliest of (a) December 31, 2021, (b) the last day of the fiscal year (i) in which we have total annual gross revenue of at least $1.0 billion or (ii) in which we are deemed to be a large accelerated filer, which means the market value of its common stock that is held by non-affiliates exceeds $700.0 million as of the end of the previous second fiscal quarter, and (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remain an “emerging growth company” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our securities less attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active and more volatile trading market for our securities.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. To the extent we take advantage of the extended transition period for complying with new or revised accounting standards, it will be more difficult for investors and securities analysts to evaluate us since our financial statements may not be comparable to companies that comply with public company effective dates and may result in less investor confidence.

There are significant potential conflicts of interest that could impact our investment returns.

Certain of our executive officers and directors, and members of the investment committee of GECM, serve or may serve as officers, directors or principals of other entities and affiliates of GECM and investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders’ best interests or that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For example, Peter A. Reed, our President, Chief Executive Officer and chairman of our Board is GECM’s Chief Investment Officer and Chief Executive Officer of the second largest beneficial owner of our stock, GEC.

Although funds managed by GECM may have different primary investment objectives than we do, they may from time to time invest in asset classes similar to those targeted by us. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also, from time to time, invest in asset classes similar to those targeted by us. It is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with GECM.

We will pay management and incentive fees to GECM, and will reimburse GECM for certain expenses it incurs. In addition, investors in our common stock will invest on a gross basis and receive distributions

 

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on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.

GECM’s management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.

The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan or note that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.

The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, both we and GECM have the right to terminate the agreement without penalty upon 60 days’ written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation.

Pursuant to the Administration Agreement, we pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under the Administration Agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.

As a result of the arrangements described above, there may be times when our management team has interests that differ from those of our stockholders, giving rise to a conflict.

Our stockholders may have conflicting investment, tax and other objectives with respect to their investments in us. The conflicting interests of individual stockholders may relate to or arise from, among other things, the nature of our investments, the structure or the acquisition of our investments, and the timing of disposition of our investments. As a consequence, conflicts of interest may arise in connection with decisions made by GECM, including with respect to the nature or structuring of our investments, that may be more beneficial for one stockholder than for another stockholder, especially with respect to stockholders’ individual tax situations. In selecting and structuring investments appropriate for us, GECM will consider the investment and tax objectives of us and our stockholders, as a whole, not the investment, tax or other objectives of any stockholder individually.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

Some of the statements in this prospectus (including in the following discussion) constitute forward-looking statements, which relate to future events or our future performance or financial conditions. The forward-looking statements contained in this prospectus involve a number of risks and uncertainties, including statements concerning:

 

   

our, or our portfolio companies’, future business, operations, operating results or prospects;

 

   

the return or impact of current and future investments;

 

   

the impact of a protracted decline in the liquidity of credit markets on our business;

 

   

the impact of fluctuations in interest rates on our business;

 

   

the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;

 

   

our contractual arrangements and relationships with third parties;

 

   

the general economy and its impact on the industries in which we invest;

 

   

the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our financing resources and working capital;

 

   

the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;

 

   

the timing of cash flows, if any, from the operations of our portfolio companies;

 

   

the timing, form and amount of any dividend distributions; and

 

   

our ability to maintain our qualification as a RIC and as a BDC.

We use words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “could,” “may,” “plan” and similar words to identify forward- looking statements. The forward-looking statements contained in this prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth under “Risk Factors.”

We have based the forward-looking statements included in this prospectus on information available to us on the date of this prospectus, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC.

You should understand that, under Sections 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with any offering of securities pursuant to this prospectus or in any report that we file under the Exchange Act.

 

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USE OF PROCEEDS

The net proceeds of the offering are estimated to be approximately $         (or approximately $        if the underwriters exercise their over-allotment option in full) after deducting the underwriting discount and commissions and estimated offering expenses of approximately $500,000 payable by us.

We intend to use the net proceeds from the sale of the Notes to make investments consistent with our investment objectives and for general corporate purposes. We do not intend to use any proceeds of the offering to pay required distributions, management fees or other expenses. Nevertheless, to the extent that our current cash and cash equivalents holdings are invested in other investment opportunities before we receive the proceeds of this offering, some portion of the proceeds from this offering may be used to pay required distributions, management fees and other expenses. We anticipate that it will take approximately three to six months after completion of this offering to invest substantially all of the net proceeds in investments consistent with our investment objectives or to otherwise utilize such proceeds. Pending the investment of the net proceeds in investments consistent with our investment objectives, we may invest the net proceeds of this offering in cash, cash equivalents, U.S. Government securities, money market mutual funds and other high-quality debt instruments that mature in one year or less, or “temporary investments,” as appropriate. These securities may have lower yields than our other investments and accordingly result in lower distributions, if any, by us during such period. See “The Company—Regulation as a Business Development Company.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2018:

 

   

On an actual basis; and

 

   

On an as adjusted basis to give effect to the assumed sale of $        million aggregate principal amount of the Notes at a public offering price of $25.00 per Note, after deducting underwriting discounts and commissions of approximately $        million and estimated offering expenses of $0.5 million payable by us.

This table should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus.

 

Dollar amounts in thousands (except per share amounts)    As of June 30, 2018  
     Actual     As Adjusted  

Cash and cash equivalents

   $ 3,942     $                

Total assets

     286,630    

2022 Notes

     31,342    

2025 Notes

     44,572    

The Notes (1)

     —      

Total liabilities

   $ 161,039     $    
  

 

 

   

 

 

 

NET ASSETS

    

Common stock, par value $0.01 per share, 100,000,000 common stock authorized, 10,652,401 shares issued and outstanding

   $ 107     $    

Additional paid in capital

     198,426    

Accumulated undistributed net investment income

     9,138    

Accumulated undistributed net realized loss from investments

     (32,201  

Net unrealized depreciation on investments

     (49,879  

Total net assets

     125,591    
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 286,630     $    
  

 

 

   

 

 

 

 

(1)

Excludes up to $        million in aggregate principal amount of Notes issuable by us upon exercise of the underwriters’ over-allotment option.

 

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RATIOS OF EARNINGS TO FIXED CHARGES

The following table contains our ratios of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our consolidated financial statements, including the related notes to those statements, included in this prospectus.

 

     For the Six
Months Ended
June 30, 2018
     For the Year Ended
December 31, 2017
     For the Period
Ended December
31, 2016
 

Earnings to Fixed Charges (1)

     (2)        (3)        (4)  

 

(1)

Earnings include net realized and unrealized gains or losses and the capital gains incentive fee expense accrued in accordance with GAAP. Net realized and unrealized gains or losses and the capital gains incentive fee expense accrued in accordance with GAAP can vary substantially from period to period. Excluding the net realized and unrealized gains or losses and any capital gains incentive fee expense accrued in accordance with GAAP, the earnings to fixed charges ratio would be 3.62 for the six months ended June 30, 2018 and 12.56 for the year ended December 31, 2017.

(2)

Due to our loss for the six months ended June 30, 2018, the ratio coverage was less than one-to-one. We would have needed to generate additional earnings of approximately $4.1 million to achieve a coverage of one-to-one for the six months ended June 30, 2018.

(3)

Due to our loss for the year ended December 31, 2017, the ratio coverage was less than one-to-one. We would have needed to generate additional earnings of approximately $4.8 million to achieve a coverage of one-to-one for the year ended December 31, 2017.

(4)

Due to our loss for the year ended December 31, 2016, the ratio coverage was less than one-to-one. We would have needed to generate additional earnings of approximately $18.2 million to achieve a coverage of one-to-one for the year ended December 31, 2016.

 

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SENIOR SECURITIES

Information about our senior securities is shown in the following table. Dollar amounts are presented in thousands.

 

Year

   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      $ 6.17        N/A      $ 1.02

December 31, 2017

                   

2022 Notes

     $ 32,631      $ 5.01        N/A      $ 1.02

June 30, 2018

                   

2022 Notes

     $ 32,631      $ 2.55        N/A      $ 1.02

2025 Notes

     $ 46,398      $ 2.55        N/A      $ 1.00

 

(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 our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1 of indebtedness.

(3)

The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.

(4)

The average market value per unit for the notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness for each period, and since November 4, 2016 for the period ended December 31, 2016.

 

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DESCRIPTION OF THE NOTES

The Notes will be issued under an indenture, dated as of September 18, 2017, and the third supplemental indenture thereto, to be entered into between us and American Stock Transfer & Trust Company, LLC, as trustee. We refer to the indenture, as supplemented by the third supplemental indenture, as the indenture and to American Stock Transfer & Trust Company, LLC as the Trustee. The Notes are governed by the indenture, as required by federal law for all bonds and notes of companies that are publicly offered. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The Trustee has two main roles. First, the Trustee can enforce your rights against us if we default. There are some limitations on the extent to which the Trustee acts on your behalf, described in the second paragraph under “—Events of Default—Remedies if an Event of Default Occurs.” Second, the Trustee performs certain administrative duties for us with respect to our Notes.

This section includes a description of the material terms of the Notes and the indenture. Because this section is a summary, however, it does not describe every aspect of the Notes and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of the Notes. The indenture has been attached as an exhibit to the registration statement of which this prospectus is a part and filed with the SEC. See “Where You Can Find More Information” for information on how to obtain a copy of the indenture.

We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the Investment Company Act, is at least equal to 150% immediately after each such issuance, as such obligation may be amended or superseded and giving effect to any exemptive relief that may be granted to us by the SEC. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or common stock in certain cases, unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage.

General

The Notes will mature on                     , 20        . The principal payable at maturity will be 100.0% of the aggregate principal amount. The interest rate of the Notes is     % per year, and interest will be paid every                 ,                 ,                   and                 , beginning                 ,                  and the regular record dates for interest payments will be every                 ,                 ,                   and                 , commencing                 ,                 . If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. The initial interest period will be the period from and including                 , 2018 to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

We will issue the Notes in minimum denominations of $25 and integral multiples of $25 in excess thereof. The Notes will not be subject to any sinking fund and holders of the Notes will not have the option to have the Notes repaid prior to the stated maturity date.

The indenture does not limit the amount of debt (including secured debt) that may be issued by us or our subsidiaries under the indenture or otherwise, but does contain a covenant regarding our asset coverage that would have to be satisfied at the time of our incurrence of additional indebtedness. See “—Other Covenants.” Other than the foregoing and as described under “—Other Covenants,” the indenture does not contain any financial covenants and does not restrict us from paying dividends or

 

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issuing or repurchasing our other securities. Other than restrictions described under “—Merger, Consolidation or Sale of Assets” below, the indenture does not contain any covenants or other provisions designed to afford holders of the Notes protection in the event of a highly leveraged transaction involving us or if our credit rating declines as the result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us that could adversely affect your investment in us.

We have the ability to issue indenture securities with terms different from the Notes and, without the consent of the holders thereof, to reopen the Notes and issue additional Notes.

Optional Redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after                 ,                 upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price equal to 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.

You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the Investment Company Act, to the extent applicable.

If we redeem only some of the Notes, the Trustee or, with respect to global securities, DTC will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture and the Investment Company Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Global Securities

Each Note will be issued in book-entry form and represented by a global security that we deposit with and register in the name of DTC, New York, New York, or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security. For more information about these arrangements, see “—Book-Entry Procedures” below.

Termination of a Global Security

If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.

Payment and Paying Agents

We will pay interest to the person listed in the Trustee’s records as the owner of the Notes at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns

 

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the Notes on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

Payments on Global Securities

We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants, as described under “—Book-Entry Procedures.”

Payments on Certificated Securities

In the event the Notes become represented by certificated securities, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date to the holder of the Notes as shown on the Trustee’s records as of the close of business on the regular record date at our office in Waltham, Massachusetts. We will make all payments of principal and premium, if any, by check at the office of the Trustee in New York, New York and/or at other offices that may be specified in a notice to holders against surrender of the Note.

Alternatively, at our option, we may pay any cash interest that becomes due on the Notes by mailing a check to the holder at his, her or its address shown on the Trustee’s records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.

Payment When Offices Are Closed

If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes.

Events of Default

You will have rights if an Event of Default occurs with respect to the Notes and the Event of Default is not cured, as described later in this subsection.

The term “Event of Default” with respect to the Notes means any of the following:

 

   

We do not pay the principal of any Note when due and payable.

 

   

We do not pay interest on any Note when due, and such default is not cured within 30 days.

 

   

We remain in breach of any other covenant with respect to the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the Trustee or holders of at least 25% of the principal amount of the Notes.

 

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We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and, in the case of certain orders or decrees entered against us under any bankruptcy law, such order or decree remains undischarged or unstayed for a period of 90 days.

 

   

If, pursuant to Sections 18(a)(1)(c)(ii) and 61 of the Investment Company Act, or any successor provisions thereto of the Investment Company Act, on the last business day of each of 24 consecutive calendar months the Notes have an asset coverage (as such term is used in the Investment Company Act) of less than 100%, as such obligation may be amended or superseded but giving effect to any exemptive relief that may be granted to us by the SEC.

An Event of Default for the Notes does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The Trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

If an Event of Default has occurred and has not been cured, the Trustee or the holders of at least 25% in principal amount of the Notes may declare the entire principal amount of all the Notes to be due and immediately payable. If an Event of Default referred to in the second to last bullet point above with respect to us has occurred, the entire principal amount of all the Notes will automatically become due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes if (1) we have deposited with the Trustee all amounts due and owing with respect to the Notes (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.

Except in cases of default, where the Trustee has some special duties, the Trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the Trustee protection reasonably satisfactory to it from expenses and liability (called an “indemnity”). If reasonable indemnity is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the Trustee. The Trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass the Trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

   

You must give the Trustee written notice that an Event of Default has occurred with respect to the Notes and remains uncured.

 

   

The holders of at least 25% in principal amount of all the Notes must make a written request that the Trustee take action because of the default and must offer reasonable indemnity to the Trustee against the cost and other liabilities of taking that action.

 

   

The Trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity.

 

   

The holders of a majority in principal amount of the Notes must not have given the Trustee a direction inconsistent with the above notice during that 60-day period.

However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.

 

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Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the Trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to the Trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the Notes, or else specifying any default.

Waiver of Default

Holders of a majority in principal amount of the Notes may waive any past defaults other than a default:

 

   

in the payment of principal or interest; or

 

   

in respect of a covenant that cannot be modified or amended without the consent of each holder of the Notes.

Merger, Consolidation or Sale of Assets

Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:

 

   

Where we merge out of existence or convey or transfer substantially all of our assets, the resulting entity must agree to be legally responsible for our obligations under the Notes;

 

   

The merger or sale of assets must not cause a default on the Notes and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specified period of time were disregarded; and

 

   

We must deliver certain certificates and documents to the Trustee.

Modification or Waiver

There are three types of changes we can make to the indenture and the Notes issued thereunder.

Changes Requiring Your Approval

First, there are changes that we cannot make to the Notes without approval from each affected holder. The following is a list of those types of changes:

 

   

change the stated maturity of the principal of or interest on the Notes;

 

   

reduce any amounts due on the Notes;

 

   

reduce the amount of principal payable upon acceleration of the maturity of the Notes following a default;

 

   

change the place or currency of payment on the Notes;

 

   

impair your right to sue for payment;

 

   

reduce the percentage of holders of Notes whose consent is needed to modify or amend the indenture; and

 

   

reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults.

 

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Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect.

Changes Requiring Majority Approval

Any other change to the indenture and the Notes would require the following approval:

 

   

If the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes.

 

   

If the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Your Approval.”

Further Details Concerning Voting

When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security (including the Notes):

Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. Debt securities will also not be eligible to vote if they have been fully defeased as described below under “—Defeasance—Full Defeasance.”

We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.

Defeasance

The following defeasance provisions will be applicable to the Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below, we would be released from certain covenants under the indenture relating to the Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the indenture, and while the Notes could not be accelerated for any reason, the holders of Notes nonetheless would be guaranteed to receive the principal and interest owed to them.

 

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Covenant Defeasance

Under current U.S. federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If applicable, you also would be released from the subordination provisions described under “—Indenture Provisions—Ranking” below. In order to achieve covenant defeasance, we must do the following:

 

   

Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their due dates.

 

   

We must deliver to the Trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity.

 

   

Defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our other material agreements or instruments.

 

   

No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or Events of Default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

 

   

We must deliver to the Trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the Investment Company Act and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.

If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the Trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

Full Defeasance

If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes of a particular series (called “full defeasance”) if the following conditions are satisfied in order for you to be repaid:

 

   

Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates.

 

   

We must deliver to the Trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal release from the Notes would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for the Notes and you would recognize a gain or loss on the Notes at the time of the deposit.

 

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We must deliver to the Trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the Investment Company Act and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with.

 

   

Defeasance must not result in a breach or violation of, or constitute a default under, the indenture or any of our other material agreements or instruments.

 

   

No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or Events of Default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your Notes were subordinated as described later under “—Indenture Provisions—Ranking,” such subordination would not prevent the Trustee under the indenture from applying the funds available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such Notes for the benefit of the subordinated debtholders.

Other Covenants

In addition to any other covenants described in this prospectus, as well as standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment, our payment of taxes and related matters, the following covenants will apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate, whether or not it is subject to, Section 18 (a)(1)(A) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded but giving effect to any exemptive relief that may be granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the Investment Company Act, equals at least 150% after such borrowings. See “Risk Factors—Risks Relating to Our Business and Structure—Recently enacted legislation permits us to incur additional debt.”

 

   

We agree that for the period of time during which the Notes are outstanding, we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the Investment Company Act) of at least the threshold specified in pursuant to Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded (regardless of whether we are subject thereto), after deducting the amount of such dividend, distribution or purchase price, as the case may be, and giving effect, in each case, (i) to any exemptive relief granted to us by the SEC and (ii) to any no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a RIC under Subchapter M of the Code.

 

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If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we will furnish to holders of the Notes and the Trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable GAAP.

Notwithstanding the restrictions on indebtedness and dividends described above, the indenture under which the Notes will be issued may not prohibit us from paying distributions to our stockholders if we incur indebtedness in excess of the limits set forth in Sections 61(a)(1) and (2) of the Investment Company Act or any successor provision if we determine that such indebtedness, which may include indebtedness under a bank credit facility, is not a “senior security” for purposes of determining asset coverage under the Investment Company Act.

Form, Exchange and Transfer of Certificated Registered Securities

If registered Notes cease to be issued in book-entry form, they will be issued:

 

   

only in fully registered certificated form;

 

   

without interest coupons; and

 

   

unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.

Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.

Holders may exchange or transfer their certificated securities at the office of the Trustee. We have appointed the Trustee to act as our agent for registering Notes in the names of holders transferring Notes. We may appoint another entity to perform these functions or perform them ourselves.

Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.

If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt security as described in this subsection, since it will be the sole holder of the debt security.

 

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Concerning the Trustee

The Trustee serves as trustee for the 2022 Notes and the 2025 Notes and as transfer agent for our common stock and agent for our dividend reinvestment plan. We will appoint the Trustee as registrar and paying agent under the indenture.

Resignation of Trustee

The Trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

Indenture Provisions—Ranking

The Notes will be our direct unsecured obligations and will rank:

 

   

pari passu , or equal, with our existing and future unsecured indebtedness, including, without limitation, the 2022 Notes and the 2025 Notes;

 

   

senior to our common stock and any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

   

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries.

Effective subordination means that in any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets.

Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness (as defined below). In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on the Senior Indebtedness has been made or duly provided for in money or money’s worth.

In the event that, notwithstanding the foregoing, any payment by us is received by the Trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities, upon our dissolution, winding up, liquidation or reorganization before all Senior Indebtedness is paid in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.

 

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By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities or the holders of any indenture securities that are not Senior Indebtedness or subordinated debt securities. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.

Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:

 

   

our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed, that we have designated as “Senior Indebtedness” for purposes of the indenture and in accordance with the terms of the indenture (including any indenture securities designated as Senior Indebtedness), and

 

   

renewals, extensions, modifications and refinancings of any of this indebtedness.

Book-Entry Procedures

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC, and will be deposited with DTC. Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of us, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org .

 

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Purchases of the Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Notes, except in the event that use of the book-entry system for the Notes is discontinued.

To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Redemption proceeds, distributions, and interest payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the Trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the Trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this prospectus.

Overview

We are a BDC that seeks to generate both current income and capital appreciation through debt and equity investments. Our investment focus is on debt obligations of middle-market companies for which quotations are typically available in the credit markets. We invest primarily in the debt of middle-market companies as well as small businesses, generally in the form of senior secured and unsecured notes, as well as in senior secured loans, junior loans and mezzanine debt. We will from time to time make equity investments as part of restructuring credits and in rare instances reserve the right to make equity investments directly.

On September 27, 2016, we and GECM entered into the Investment Management Agreement and the Administration Agreement, and, upon closing the Merger, we began to accrue obligations to our external investment manager under those agreements.

We have elected to be treated as a RIC for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify as a RIC, we must, among other things, meet source-of-income and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our investment company taxable income on a timely basis. If we qualify as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.

All dollar amounts stated in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, other than per share amounts, are disclosed in thousands unless otherwise noted.

Formation Transactions

On June 23, 2016, we entered into the Subscription Agreement under which:

 

   

On June 23, 2016, GEC contributed $30,000 in exchange for 1,966,667 shares of our common stock.

 

   

On September 27, 2016 before we elected to be a BDC, the MAST Funds contributed to us the Initial GECC Portfolio that we valued at $90,000 in exchange for 5,935,800 shares of our common stock.

For financial reporting purposes, we have accounted for the contribution of the Initial GECC Portfolio as an asset acquisition per Topic 805,  Business Combinations , of the Accounting Standards Codification (the “ASC”). For tax purposes, we recorded our basis in the Initial GECC Portfolio at the fair market value of the Initial GECC Portfolio as of the date of contribution.

Under the Subscription Agreement, upon consummation of the Merger, we became obligated to reimburse the costs incurred by GEC and the MAST Funds in connection with the Merger and the transactions contemplated by the Subscription Agreement.

Following the closing of the Merger, we entered into an amended and restated registration rights agreement, dated as of November 4, 2016, with GEC and the MAST Funds.

 

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Full Circle Merger

On June 23, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Full Circle. Following approval on October 31, 2016 of the Merger by Full Circle’s stockholders, on November 3, 2016:

 

   

Full Circle merged into us resulting in our acquisition by operation of the Merger of Full Circle’s portfolio that we valued at $74,658 at November 3, 2016;

 

   

We became obligated to issue an aggregate of 4,986,585 shares of our common stock to former Full Circle stockholders; and

 

   

Our exchange agent paid a $5,393 special cash dividend to former Full Circle stockholders.

We accounted for the Merger as a business combination under ASC Topic 805 and Regulation S-X’s purchase accounting guidance. GECC was designated as the acquirer for accounting purposes. The difference between the fair value of Full Circle’s net assets and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than that of the merger consideration paid.

Investments

Our level of investment activity varies substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available to middle-market companies from other sources, the level of merger and acquisition activity, pricing in the high yield and leveraged loan credit markets, our expectations of future investment opportunities, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements. See “The Company—Regulation as a Business Development Company” and “Certain Material U.S. Federal Income Tax Considerations.”

Revenues

We generate revenue primarily in the form of interest on the debt investments that we hold. We may also generate revenue from dividends on the equity investments, capital gains on the disposition of investments, and certain lease, fee, or other income. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Our debt investments generally pay interest quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, due diligence fees, end-of-term or exit fees, fees for providing significant managerial assistance, consulting fees and other investment-related income.

Expenses

Our primary operating expenses include the payment of a base management fee, administration fees (including the allocable portion of overhead under the Administration Agreement), and, depending on our operating results, an incentive fee. The base management fee and incentive fee remunerates GECM for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our Administration Agreement provides for reimbursement of costs and expenses incurred for office space rental, office equipment and utilities allocable to us under the Administration Agreement, as well as certain costs and expenses incurred relating to non-investment advisory, administrative or operating services provided by GECM or its affiliates to us. We also bear all other costs and expenses of our operations and transactions. Our expenses include interest on our outstanding indebtedness.

 

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Critical Accounting Policies

Valuation of Portfolio Investments

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, short-term debt investments with remaining maturities within 90 days are generally valued at amortized cost, which approximates fair value.

Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, are valued at fair value using a valuation process consistent with our Board-approved policy. Our Board approves in good faith the valuation of our portfolio as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may impact the market quotations used to value some of our investments.

The valuation process approved by our Board with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:

 

   

The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to independent valuation firms approved by our Board;

 

   

Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented and discussed with senior management of GECM;

 

   

The fair value of smaller investments comprising in the aggregate less than 5% of our total capitalization may be determined by GECM in good faith in accordance with our valuation policy without the employment of an independent valuation firm; and

 

   

Our audit committee recommends, and our Board determines, the fair value of the investments in our portfolio in good faith based on the input of GECM, our independent valuation firms (to the extent applicable) and the business judgment of our audit committee and our Board, respectively.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value

 

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indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral; the portfolio 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.

We prefer the use of observable inputs and minimize the use of unobservable inputs in our valuation process. Inputs refer broadly to the assumptions that market participants would use in pricing an asset. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset developed based on the best information available in the circumstances.

Investments are classified in accordance with GAAP into the three broad levels as follows:

 

Level 1    Investments valued using unadjusted quoted prices in active markets for identical assets.
Level 2    Investments valued using other unadjusted observable market inputs, e.g. quoted prices for our securities in markets that are not active or quotes for comparable instruments.
Level 3    Investments that are valued using quotes for our securities or comparable instruments and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.

All Level 3 investments that comprise more than 5% of the investments of GECC are valued by independent third party valuation firms. Although our Board remains ultimately and solely responsible for the valuation of each of our investments.

Revenue Recognition

Interest and dividend income, including PIK income, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including OID, earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are recognized when earned and are included in interest income.

We may purchase debt investments at a discount to their face value. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method, unless there are material questions as to collectability. For debt instruments where we are amortizing OID, when principal payments on the debt instrument are received in an amount in excess of the debt instrument’s amortized cost, the excess principal payments are recorded as interest income.

Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the

 

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first-in, first-out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment fair value and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Portfolio and Investment Activity

The following is a summary of our investment activity since our inception in April 2016:

 

Time Period    Acquisitions (1)      Dispositions (2)     Weighted Average
Interest Rate

End of  Period (3)
 

Formation Transactions

   $ 90,494      $ —      

Merger

     74,658        —      

November 4, 2016 through December 31, 2016

     42,006        (41,738     10.00
  

 

 

    

 

 

   

For the period ended December 31, 2016

     207,158        (41,738  
  

 

 

    

 

 

   

Quarter ended March 31, 2017

     75,852        (78,758     9.87

Quarter ended June 30, 2017

     21,395        (37,570     9.59

Quarter ended September 30, 2017

     49,467        (18,884     9.62

Quarter ended December 31, 2017

     53,163        (39,772     11.17
  

 

 

    

 

 

   

For the year ended December 31, 2017

     199,877        (174,984  
  

 

 

    

 

 

   

Quarter ended March 31, 2018

     63,220        (29,069     11.05

Quarter ended June 30, 2018

     37,927        (27,729     9.94
  

 

 

    

 

 

   

For the period ended June 30, 2018

     101,147        (56,798  
  

 

 

    

 

 

   

Since inception

   $ 508,182      $ (273,520  
  

 

 

    

 

 

   

 

(1)

Includes new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings and PIK income. Investments in short-term securities, including United States Treasury Bills and money market mutual funds, were excluded.

(2)

Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities). Investments in short-term securities, including United States Treasury Bills and money market mutual funds, were excluded.

(3)

Weighted average interest rate is based upon the stated coupon rate and par value of outstanding debt securities at the measurement date. Debt securities on non-accrual status are included in the calculation and are treated as having 0% as their applicable interest rate for purposes of this calculation.

 

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Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the six months ended June 30, 2018, the year ended December 31, 2017 and the period from inception through December 31, 2016. Investments in short-term securities, including United States Treasury Bills and money market mutual funds, were excluded from the table below.

 

     For the Six
Months
Ended June
30, 2018
    For the Year
Ended

December 31,
2017
    For the
Period
from
Inception
through
December  31,

2016
 

Beginning Investment Portfolio

   $ 164,870     $ 154,677     $ —    

Portfolio Investments acquired via the Formation Transactions and the Merger

     —         —         165,152  

Portfolio Investments acquired (1)

     101,147       199,878       42,006  

Amortization of premium and accretion of discount, net

     1,409       5,627       2,438  

Portfolio Investments repaid or sold (2)

     (56,798     (174,983     (41,738

Net change in unrealized appreciation (depreciation) on investments

     (12,456     (23,962     (13,455

Net realized gain (loss) on investments

     1,131       3,633       274  
  

 

 

   

 

 

   

 

 

 

Ending Investment Portfolio

   $ 199,303     $ 164,870     $ 154,677  
  

 

 

   

 

 

   

 

 

 

 

(1)

Includes new investments, additional fundings (inclusive of those on revolving credit facilities), refinancings, and capitalized PIK income.

(2)

Includes scheduled principal payments, prepayments, sales, and repayments (inclusive of those on revolving credit facilities).

During the three and six months ended June 30, 2018, inclusive of short-term securities, we recorded net change in unrealized depreciation of $(4,240) and $(12,462), respectively, of which $(2,681) and $0, respectively, was related to valuation of PIK interest receivable.

Portfolio Classifications

The following table shows the fair value of our portfolio of investments by asset class as of June 30, 2018, and December 31, 2017 and 2016:

 

    June 30, 2018     December 31, 2017     December 31, 2016  
    Investments at
Fair Value
    Percentage
of
Total
Portfolio
    Investments at
Fair Value
    Percentage
of
Total
Portfolio
    Investments at
Fair Value
    Percentage
of
Total
Portfolio
 

Investments:

           

Debt Instruments

  $ 185,418       93.0   $ 164,521       99.8   $ 154,176       99.7

Equity Investments

    13,971       7.0     349       0.2     433       0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments at Fair Value

  $ 199,389       100.0   $ 164,870       100.0   $ 154,609       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in short-term securities, including United States Treasury Bills and money market mutual funds, were excluded.

 

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The following table shows the fair value of our portfolio of investments by industry, as of June 30, 2017:

 

     June 30, 2017  
     Investments
at Fair
Value
     Percentage
of Total
Investment
Portfolio
 

Wireless Telecommunications Services

   $ 47,226        35.9

Building Cleaning and Maintenance Services

     17,493        13.3

Metals & Mining

     12,655        9.6

Radio Broadcasting

     9,133        6.9

Wireless Communications

     8,950        6.8

Industrial Other

     8,080        6.1

Real Estate Services

     7,316        5.6

Consumer Discretionary

     7,236        5.5

Information and Data Services

     4,467        3.4

Consumer Finance

     3,071        2.3

Maritime Security Services

     2,220        1.7

Water Transport

     1,737        1.3

Hotel Operator

     1,306        1.0

Internet Advertising

     666        0.5

Grain Mill Products

     74        0.1

Energy Efficiency Services

     —          0.0
  

 

 

    

 

 

 

Total

   $ 131,630        100.0
  

 

 

    

 

 

 

The following table shows the fair value of our portfolio of investments by industry, as of June 30, 2018:

 

     June 30, 2018  
     Investments
at Fair
Value
     Percentage
of Net
Assets
 

Wireless Telecommunication Services

   $ 41,950        33.40

Building Cleaning and Maintenance Services

     18,766        14.94

Manufacturing

     16,450        13.10

Industrial Conglomerates

     14,138        11.26

Retail

     13,685        10.90

Software Services

     13,646        10.87

Technology Services

     13,306        10.59

Gaming, Lodging & Restaurants

     9,801        7.80

Chemicals

     9,571        7.62

Radio Broadcasting

     8,869        7.06

Real Estate Services

     7,291        5.81

Business Services

     7,291        5.81

Water Transport

     6,206        4.94

Information and Data Services

     4,841        3.85

Oil, Gas & Coal

     4,611        3.67

Industrial Other

     3,316        2.64

Hotel Operator

     2,574        2.05

Consumer Finance

     2,448        1.95

Wireless Communications

     272        0.22

Grain Mill Products

     237        0.19

Maritime Security Services

     34        0.03

Short-Term Investments

     79,190        63.05
  

 

 

    

 

 

 

Total

   $ 278,493        221.75
  

 

 

    

 

 

 

 

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Results of Operations

Total Investment Income

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     2018     2017  
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
 

Total Investment Income

  $ 7,162     $ 0.67     $ 6,237     $ 0.52     $ 14,660     $ 1.38     $ 13,552     $ 1.10  

Interest income

    6,982       0.66       6,138       0.51       14,347       1.35       12,964       1.05  

Dividend income

    49       0.00       85       0.01       155       0.01       131       0.01  

Other income

    131       0.01       14       0.00       158       0.01       457       0.04  

 

(1)

The per share amounts are based on a weighted average of 10,652,401 shares for each of the three months ended June 30, 2018 and the six months ended June 30, 2018.

(2)

The per share amounts are based on a weighted average of 12,000,803 shares for the three months ended June 30, 2017 and a weighted average of 12,316,884 shares for the six months ended June 30, 2017.

Interest income included net accretion of OID and market discount of $458 and $1,409 for the three and six months ended June 30, 2018, respectively. Interest income also included accrued PIK income of $1,725 and $5,002 for the three and six months ended June 30, 2018, respectively.

Total investment income for the three and six months ended June 30, 2018 increased as compared to total investment income for the three and six months ended June 30, 2017 primarily due to increased interest income, as a result of the interest earning investment portfolio growing year over year.

Period Ended December 31, 2016

 

     In Thousands      Per Share (1)  

Total Investment Income (2)

   $ 5,831      $ 0.45  

Interest Income

     5,313        0.41  

Other Income

     518        0.04  

Net Operating Expenses

     5,826        0.45  

Management Fee

     392        0.03  

Incentive Fee

     863        0.07  
  

 

 

    

 

 

 

Total Advisory Fees

     1,255        0.10  

Total Costs Incurred Under Administration

Agreement

     224        0.02  

Directors’ Fees

     38        0.00  

Interest Expenses

     420        0.03  

Professional Services Expense

     186        0.01  

Professional Services Expense related to the Merger and Formation transactions

     3,471        0.27  

Bank Fees

     10        0.00  

Other

     214        0.02  

Income tax expense, including excise tax

     88        0.01  

Fees Waivers and Expense Reimbursement

     80        0.01  
  

 

 

    

 

 

 

Net Investment Income

   $ 5      $ 0.00  
  

 

 

    

 

 

 

 

(1)

The per share amounts are based on a weighted average of 12,852,758 shares for the period ended December 31, 2016, except where such amounts need to be adjusted to be consistent with the financial highlights of our consolidated financial statements.

 

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(2)

Total investment income includes PIK income of $510 for the period from inception through December 31, 2016.

Year Ended December 31, 2017

 

     In Thousands      Per Share (1)  

Total Investment Income (2)

   $ 29,728      $ 2.55  

Interest Income

     28,924        2.48  

Dividend Income

     298        0.03  

Other Income

     506        0.04  

Net Operating Expenses

     12,153        1.03  

Management fees

     2,298        0.20  

Incentive fees

     4,394        0.38  
  

 

 

    

 

 

 

Total Investment Management Fees

     6,692        0.57  

Administration fees

     1,362        0.12  

Directors’ fees

     136        0.01  

Interest expense

     2,039        0.17  

Professional services

     1,013        0.09  

Custody Fees

     62        0.01  

Other

     655        0.06  

Income Taxes

     124        0.01  

Fees Waivers and Expense Reimbursement

     (70      (0.01
  

 

 

    

 

 

 

Net Investment Income

   $ 17,575      $ 1.52  
  

 

 

    

 

 

 

 

(1)

The per share amounts are based on a weighted average of 11,655,370 shares for the year ended December 31, 2017, except where such amounts need to be adjusted to be consistent with the financial highlights of our consolidated financial statements.

(2)

Total investment income includes PIK income of $11,709 for the year ended December 31, 2017.

Total Investment Income for the year ended December 31, 2017 was $29,728, which included $28,924 of interest income. Interest income included non-cash income of $17,336, which includes net accretion of OID and market discount and PIK income. Of the PIK income, $8,702 was associated with our investments in Avanti. At December 31, 2017, we had accrued $1,091 of interest income that was subject to future PIK toggle elections.

We also generated $506 of fee income. Fee income was largely comprised of amendment fees on our loans to RiceBran Technologies Inc. and Pristine Environments, LLC and our Avanti bonds.

Total Investment Income increased for the year ended December 31, 2017 as compared to the period ended December 31, 2016 primarily due to increased interest income, related to the investment portfolio being held for a longer time period during the year ended December 31, 2017. Dividend income increased due to payments related to our short term investments in money market mutual funds, as our short term investments were held for a longer time period during the year ended December 31, 2017.

 

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Expenses

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     2018     2017  
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
 

Net Operating Expenses

  $ 1,084     $ 0.10     $ 2,759     $ 0.24     $ 4,716     $ 0.44     $ 5,980     $ 0.49  

Management fees

    754       0.07       546       0.05       1,447     $ 0.14       1,139       0.09  

Incentive fees

    (2,149     (0.20     871       0.07       (1,183   $ (0.10     1,894       0.15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total advisory fees

  $ (1,395   $ (0.13   $ 1,417     $ 0.12     $ 264     $ 0.02     $ 3,033     $ 0.25  

Administration fees

    487       0.05       272       0.02       797       0.07       767       0.06  

Directors’ fees

    50       0.00       21       0.00       99       0.01       48       0.00  

Interest expense

    1,456       0.14       631       0.05       2,731       0.26       1,262       0.10  

Professional services

    294       0.03       176       0.01       465       0.04       507       0.04  

Custody fees

    15       0.00       11       0.00       29       0.00       24       0.00  

Other

    177       0.02       156       0.01       331       0.03       269       0.02  

Fee Waivers and Expense Reimbursement

    —         —         75       0.01       —         —         70       0.01  

 

(1)

The per share amounts are based on a weighted average of 10,652,401 shares for each of the three months ended June 30, 2018 and the six months ended June 30, 2018.

(2)

The per share amounts are based on a weighted average of 12,000,803 shares for the three months ended June 30, 2017 and a weighted average of 12,316,884 shares for the six months ended June 30, 2017.

Net expenses for the three and six months ended June 30, 2018 decreased as compared to net expenses for the three and six months ended June 30, 2017 primarily due to the reversal of $2,637 of incentive fees recorded in prior periods. Our largest investment, Avanti has generated significant non-cash income in the form of PIK interest. In connection with the recent restructuring of Avanti, which closed on April 26, 2018, our investment in the Existing Avanti Notes was converted into Avanti common equity. As a result of this debt-for-equity conversion, we have determined that the accrued incentive fees payable associated with the portion of such PIK interest generated by the Existing Avanti Notes should not at this time be recognized as a liability and as such we have reversed for prior periods. Notwithstanding this reversal, such incentive fees remain payable under the Investment Management Agreement (subject to achievement of return hurdles) and will be recognized as an expense to the extent that an exit or recovery results in gross proceeds to us in excess of our initial cost basis in the Existing Avanti Notes.

Excluding the impact of the incentive fee reversal described above, net expenses for the three and six months ended June 30, 2018 increased as compared to net expenses for the three and six months ended June 30, 2017 primarily due to increased interest expense, as a result of having a greater amount of debt outstanding compared to the prior year. The 2025 Notes were newly issued in January 2018. See “—Liquidity and Capital Resources—Notes Payable” for further information.

 

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Period Ended December 31, 2016

 

     In Thousands      Per Share (1)  

Net Operating Expenses

   $ 5,826      $ 0.45  

Management Fee

     392        0.03  

Incentive Fee

     863        0.07  
  

 

 

    

 

 

 

Total Advisory Fees

     1,255        0.10  

Total Costs Incurred Under Administration Agreement

     224        0.02  

Directors’ Fees

     38        0.00  

Interest Expenses

     420        0.03  

Professional Services Expense

     186        0.01  

Professional Services Expense related to the Merger and Formation transactions

     3,471        0.27  

Bank Fees

     10        0.00  

Other

     214        0.02  

Income tax expense, including excise tax

     88        0.01  

Fees Waivers and Expense Reimbursement

     80        0.01  

 

(1)

The per share figures are based on a weighted average of 12,852,758 shares for the period ended December 31, 2016.

Total expenses for the period from inception through December 31, 2016 were $5,826, which included $3,471 of costs associated with the Formation Transactions and Merger, which are non-recurring.

Total advisory fees were $1,255, with $392 of management fees and $863 of incentive fees accrued during the period ended December 31, 2016. The incentive fees are currently expected to be deferred in accordance with our Investment Management Agreement.

Total administration fees were $224, which includes direct costs deemed reimbursable under our Administration Agreement and fees paid for sub-administration services. We accrued $80 as of December 31, 2016 under the reimbursement provision of the Administration Agreement, based on expenses accrued through December 31, 2016. The cap on costs was determined to be zero and $70 of this was reversed for the year ended December 31, 2017 with $10 due from our sub-administrator remaining waived.

Interest expense for the period ended December 31, 2016 was $420.

Year Ended December 31, 2017

 

     In Thousands      Per Share (1)  

Net Operating Expenses

   $ 12,153      $ 1.03  

Management fees

     2,298        0.20  

Incentive fees

     4,394        0.38  
  

 

 

    

 

 

 

Total Investment Management Fees

     6,692        0.57  

Administration fees

     1,362        0.12  

Directors’ fees

     136        0.01  

Interest expense

     2,039        0.17  

Professional services

     1,013        0.09  

Custody Fees

     62        0.01  

Other

     655        0.06  

Income Taxes

     124        0.01  

Fees Waivers and Expense Reimbursement

     (70      (0.01

 

(1)

The per share figures are based on a weighted average of 11,655,370 shares for the year ended December 31, 2017.

 

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Total expenses for the year ended December 31, 2017 were $12,153.

Total advisory fees were $6,692, with $2,298 of management fees and $4,394 of incentive fees accrued during the year. The incentive fees are currently expected to be deferred in accordance with our Investment Management Agreement.

Total administration fees were $1,362 which includes direct costs deemed reimbursable under our Administration Agreement and fees paid for sub-administration services.

Interest expense for the year ended December 31, 2017 was $2,039.

Net Operating Expenses increased for the year ended December 31, 2017 as compared to the period ended December 31, 2016 primarily due to increased advisory fees, administration fees and interest expense, related to the Company being in operations for a longer time period during the year ended December 31, 2017. This was partially offset, by a reduction in professional fees related to the Merger and Formation Transactions, which were one-time expenses.

Net Investment Income

Net investment income for the six months ended June 30, 2017 was $7,572.

Net investment income for the six months ended June 30, 2018 was $9,944.

Net investment income for the period from inception through December 31, 2016 was $5, which included $3,471 of costs associated with the Formation Transactions and Merger, which are non-recurring.

Net investment income for the year ended December 31, 2017 was $17,575.

Net Realized Gains (Losses) on Investments

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     2018     2017  
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
    In
Thousands
    Per
Share (1)
    In
Thousands
    Per
Share (2)
 

Total Realized Gains

  $ 810     $ 0.08     $ 1,381     $ 0.12     $ 1,127     $ 0.11     $ 3,361     $ 0.27  

 

(1)

The per share amounts are based on a weighted average of 10,652,401 shares for each of the three months ended June 30, 2018 and the six months ended June 30, 2018.

(2)

The per share amounts are based on a weighted average of 12,000,803 shares for the three months ended June 30, 2017 and a weighted average of 12,316,884 shares for the six months ended June 30, 2017.

During the three months ended June 30, 2018, we recorded net realized gains of $810, primarily related to the realized gain on the sale of the PR Wireless, Inc. senior secured loan and a partial sale of NAAN Development Corp. senior secured bonds. Realized gains for the six months ended June 30, 2018 also include realized gains in connection with principal amortization of loans that were acquired at a discount and a partial repayment on our PE Facility Solutions, LLC (“PEFS”) Term B loan.

During the six months ended June 30, 2017 we recorded net realized gains of $3,361 primarily in connection with the disposition of several investments and the prepayment of a portion of our loan to Sonifi Solutions.

 

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During the period from inception through December 31, 2016, we recorded net realized gains of $274, primarily in connection with our disposition of our debt investments in US Shale Solutions, LLC. We also realized a loss of $4,698 associated with the purchase accounting for the Merger. We have accounted for the Merger as a business combination under ASC Topic 805 and Regulation S-X’s purchase accounting guidance. GECC was designated as the acquirer for financial reporting purposes. The difference between the fair value of net assets of Full Circle and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than that of the merger consideration paid.

During the year ended December 31, 2017, we recorded net realized gains of $3,633, primarily in connection with the partial sale and repayments of our loan to Sonifi, which resulted in a $1,997 gain. We also realized gains of $1,134 on the sale of our Everi Payments bonds, $1,007 on our disposition of our investment in JN Medical, and a loss of $745 on the write off of our loan to Ads Direct Media.

Net Change in Unrealized Appreciation (Depreciation) on Investments

Net change in unrealized appreciation (depreciation) on investments was ($10,021) for the six months ended June 30, 2017. The following table summarizes the significant changes in unrealized appreciation (depreciation) of our investment portfolio, for the six months ended June 30, 2017 by portfolio company.

 

Dollar amounts in thousands         June 30, 2017     December 31, 2016  

Portfolio Company

  Change in
Unrealized
Appreciation
(Depreciation)
    Cost     Fair
Value
    Unrealized
Appreciation
(Depreciation)
    Cost     Fair
Value
    Unrealized
Appreciation
(Depreciation)
 

Avanti Communications Group plc

  $ (7,315   $ 67,818     $ 47,226     $ (20,592   $ 55,298     $ 42,021     $ (13,277

OPS Acquisitions Limited and Ocean Protection Services Limited

    (2,051     4,240       2,220       (2,020     4,255       4,286       31  

PE Facility Solutions, LLC

    (2,009     19,502       17,493       (2,009     —         —         —    

Sonifi Solutions, Inc.

    1,152       5,302       7,236       1,934       5,933       6,715       782  

Other (1)

    202       132,185       131,396       (789     102,646       101,655       (991
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ (10,021   $ 229,047     $ 205,571     $ (23,476   $ 168,132     $ 154,677     $ (13,455
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Other represents all remaining investments.

 

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Net change in unrealized appreciation (depreciation) on investments was $(12,462) for the six months ended June 30, 2018. The following table summarizes the significant changes in unrealized appreciation (depreciation) of our investment portfolio, excluding the impact of unrealized appreciation (depreciation) on short-term securities such as U.S. Treasury Bills and money market mutual funds, for the six months ended June 30, 2018.

 

Dollar amounts in thousands     June 30, 2018     December 31, 2017  

Portfolio Company

  Change in Unrealized
Appreciation
(Depreciation)
    Cost     Fair Value     Unrealized
Appreciation
(Depreciation)
    Cost     Fair Value     Unrealized
Appreciation
(Depreciation)
 

Avanti Communications Group plc (1)

  $ (8,326   $ 83,460     $ 41,950     $ (41,510   $ 75,461     $ 42,277     $ (33,184

OPS Acquisitions Limited and Ocean Protection Services Limited

    (1,736     4,240       34       (4,206     4,240       1,770       (2,470

Tru Taj, LLC

    (2,900     17,049       13,685       (3,364     15,264       14,800       (464

Other (2)

    506       144,425       143,634       (791     107,320       106,023       (1,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ (12,456   $ 249,174     $ 199,303     $ (49,871   $ 202,285     $ 164,870     $ (37,415
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Recognition of accretion of discount and capitalized PIK interest increased our cost basis during the period. We did not fund any incremental investment during the period.

(2)

Other represents all remaining investments excluding short-term investments such as U.S. Treasury Bills and money market mutual funds.

Net change in unrealized appreciation (depreciation) for the six months ended June 30, 2017 was $(10,021). Net change in unrealized appreciation (depreciation) for the three months ended June 30, 2018 and June 30, 2017 was $(4,240) and $(7,326), respectively. In each of these periods, the change in unrealized appreciation (depreciation) is primarily driven by the performance of a few investments as noted in the table above.

Liquidity and Capital Resources

At June 30, 2018, we had approximately $3,942 of cash and cash equivalents, none of which was restricted in nature. At June 30, 2018, we also had $4,532 invested in a money market fund that is classified as an investment rather than cash and cash equivalents.

At June 30, 2018, we had investments in 29 debt instruments across 23 companies, totaling approximately $185,418 at fair value and equity investments in five companies, totaling approximately $13,971 at fair value.

In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at some future date or over a specified period of time. As of June 30, 2018, we had approximately $17,572 in unfunded loan commitments, subject to our approval and satisfaction of certain conditions in the underlying loan documents in certain instances, to provide debt financing to certain of our portfolio companies. We had sufficient cash and other liquid assets on our June 30, 2018 balance sheet to satisfy the unfunded commitments.

For the six months ended June 30, 2018, net cash used for operating activities, consisting primarily of net purchases of investments and the items described in “—Results of Operations,” was approximately $(35,986), reflecting the purchases and repayments of investments, net investment income resulting from

 

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operations, offset by non-cash income related to OID and PIK income, changes in working capital and accrued interest receivable. Net cash used for purchases and sales of investments was approximately $(36,314), reflecting principal repayments and sales of $56,798, offset by additional investments of $(93,112). Such amounts included draws and repayments on revolving credit facilities. Our Board previously set our distribution rate at $0.083 per share per month and we intend to re-evaluate our dividend rate from time to time.

Contractual Obligations

A summary of our significant contractual payment obligations as of June 30, 2018 is as follows:

 

     Total      Less than 1
year
     1-3 years      3-5 years      More than 5
years
 

2022 Notes

   $ 32,631      $ —        $ —        $ 32,631      $ —    

2025 Notes

     46,398                 46,398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 79,029      $ —        $ —        $ 32,631      $ 46,398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We have certain contracts under which we have material future commitments. Under the Investment Management Agreement, GECM provides investment advisory services to us. For providing these services, we pay GECM a fee, consisting of two components: (1) a base management fee based on the average value of our total assets and (2) an incentive fee based on our performance.

We are also party to the Administration Agreement with GECM. Under the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and other such services as our administrator.

If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.

Both the Investment Management Agreement and the Administration Agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other.

Stock Buyback Program

We implemented a stock buyback program pursuant to Rule 10b5-1 and Rule 10b-18 under the Exchange Act to repurchase our common stock in an aggregate amount of up to $15,000 through May 2018 at market prices at any time our common stock trades below 90% of net asset value, subject to our compliance with our liquidity, covenant, leverage and regulatory requirements. Our Board previously increased the overall size of the stock buyback program to a total of $50,000 with $25,000 remaining available under the program.

Inflation

Inflation has not had a significant effect on our results of operations in any of the reporting periods presented in our financial statements. However, from time to time, inflation may impact the operating results of our portfolio companies.

 

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Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Notes Payable

On November 3, 2016, we assumed approximately $33,646 in aggregate principal amount of Full Circle’s 8.25% Notes due June 30, 2020 (the “2020 Notes”). Interest on the 2020 Notes was paid quarterly in arrears at a rate of 8.25% per annum. The 2020 Notes had a maturity date of June 30, 2020. On October 20, 2017, we redeemed the 2020 Notes completely at their par value plus accrued and unpaid interest

On September 18, 2017, we sold $28,375 in aggregate principal amount of the 2022 Notes. On September 29, 2017, we sold an additional $4,256 of the 2022 Notes upon full exercise of the underwriters’ over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2022 Notes outstanding as of June 30, 2018 was $32,631.

The 2022 Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The 2022 Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the 2022 Notes on January 31, April 30, July 31 and October 31 of each year. The 2022 Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the 2022 Notes do not have the option to have the 2022 Notes repaid prior to the stated maturity date. The 2022 Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

On January 11, 2018, we sold $43,000 in aggregate principal amount of the 2025 Notes. On January 19, 2018 and February 9, 2018, we sold an additional $1,898 and $1,500 of the 2025 Notes upon partial exercise of the underwriters’ over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2025 Notes outstanding as of June 30, 2018 was $46,398.

The 2025 Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The 2025 Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the 2025 Notes on March 31, June 30, September 30 and December 31 of each year. The 2025 Notes will mature on January 31, 2025 and can be called on, or after, January 31, 2021. Holders of the 2025 Notes do not have the option to have the 2025 Notes repaid prior to the stated maturity date. The 2025 Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

Recent Developments

In July 2018, we purchased an additional $2,500 par value of Sungard Availability Services Capital, Inc. first lien senior secured term loan at a price of approximately 99% of par value.

In July 2018, we purchased an additional $2,000 par value of Commercial Barge Line Company first lien term loan at a price of approximately 72% of par value.

In July 2018, we purchased $478 par value of PFS Holdings Corp. first lien term loan at a price of approximately 60% of par value.

 

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In July 2018, we exercised all of our RiceBran Technologies Corporation warrants at a price of $1.60 per share in a cashless exercise. This transaction resulted in GECC receiving 139,392 shares. We subsequently sold all of the shares at a weighted average price of $2.43 per share.

In July 2018, in connection with the sale of one of its businesses, DataX, Ltd., The Selling Source, LLC paid down $3,800 of its outstanding $5,689 first lien, senior secured holding. The remainder of the outstanding loan was restructured, with GECC receiving $1,250 of first out term loan bearing interest at a rate of 3-month LIBOR plus 5% which matures on January 13, 2020.

In August 2018, we purchased an additional $2,647 par value of SESAC Holdco II LLC second lien senior secured loan at a price of approximately 99% of par value.

In August 2018, we purchased $2,000 par value of California Pizza Kitchen, Inc. first lien term loan at a price of approximately 98% of par value.

In August 2018, we sold our position in Foresight Energy LP at a price of approximately 100% of par value.

In August 2018, we sold our position in Nana Development Corp. first lien senior secured bond at a price of approximately 100% of par value

In August 2018, we purchased an additional $4,500 of par value of True Taj LLC first lien, Debtor in Possession Note at a price of approximately 104% of par value.

In August 2018, we purchased an additional $8,750 of par value of PFS Holdings Corp. first lien term loan at a price of approximately 60% of par value.

In August 2018, we sold $5,000 of par value of Almonde, Inc. second lien senior secured loan at a price of approximately 98% of par value.

On August 8, 2018, our Board declared the monthly distributions for the fourth quarter of 2018 at an annual rate of approximately 8.4% of our June 30, 2018 net asset value, which equates to $0.083 per month. The schedule of distribution payments is as follows:

 

     Month     

   Rate    Record Date    Payable Date

October

     $ 0.083    October 31, 2018    November 15, 2018

November

     $ 0.083    November 30, 2018    December 14, 2018

December

     $ 0.083    December 31, 2018    January 15, 2019

Reduction in Required Minimum Asset Coverage Ratio

On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the Act, was signed into law. The Act amends the Investment Company Act to permit a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein. This reduction significantly increases the amount of debt that BDCs may incur.

Prior to the enactment of the Act, BDCs were required to maintain an asset coverage ratio of at least 200% in order to incur debt or to issue other senior securities. Generally, for every $1.00 of debt incurred or in senior securities issued, a BDC was required to have at least $2.00 of assets immediately following such incurrence or issuance. For those BDCs that satisfy the Act’s disclosure and approval requirements, the minimum asset coverage ratio is reduced such that for every $1.00 of debt incurred or in senior securities issued, a BDC must now have at least $1.50 of assets.

 

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At the Annual Meeting, a majority of our stockholders approved the application of the modified minimum asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act, to the Company. As a result of such approval, and subject to satisfying certain ongoing disclosure requirements, effective May 4, 2018 the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, permitting us to incur additional leverage.

As of June 30, 2018, we had approximately $79.0 million of total outstanding indebtedness under two series of senior securities (unsecured notes)—the 2022 Notes and the 2025 Notes—and our asset coverage ratio was 255%. For risks associated with the reduction in our required minimum asset coverage ratio from 200% to 150%, see “Risk Factors—Risks Relating to Our Business and Structure—Recently enacted legislation permits us to incur additional debt,” “Risk Factors—Risks Relating to Our Business and Structure—Incurring additional indebtedness could increase the risk of investing in our Company” and “Risk Factors—Risks Relating to Our Business and Structure—Incurring additional leverage may magnify your exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability.”

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. As of June 30, 2018, eight debt investments in our portfolio bore interest at a fixed rate, and the remaining 21 debt investments were at variable rates, representing approximately $83.7 million and $101.7 million in debt at fair value, respectively. The variable rates are based upon LIBOR.

To illustrate the potential impact of a change in the underlying interest rate on our interest income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%, and 3% decrease in the underlying LIBOR, and no other change in our portfolio as of June 30, 2018. We have also assumed that we have no outstanding floating rate borrowings. The below table illustrates the effect such assumed rate changes would have on an annual basis.

 

LIBOR Increase (Decrease)

   Increase (decrease) of
Net Investment Income
(in thousands)
 

3.00%

   $ 6,490  

2.00%

   $ 4,327  

1.00%

   $ 2,163  

(1.00)%

   $ (2,152

(2.00)%

   $ (3,606

(3.00)%

   $ (4,883

This analysis does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments that could affect the net increase in net assets resulting from operations. Accordingly, no assurance can be given that actual results would not differ materially from the results under this hypothetical analysis.

We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

 

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THE COMPANY

Overview

We are a Maryland corporation that was formed in April 2016 and commenced operations on November 3, 2016 when Full Circle merged with and into us. We operate as a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act. In addition, for tax purposes, we elected to be treated as a RIC under the Code beginning with our tax year starting October 1, 2016.

Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against loss of principal, by investing predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion.

To achieve our investment objectives, we primarily focus on investing in secured and senior unsecured debt instruments in middle-market companies that offer sufficient downside protection but with the opportunity to unlock substantial return potential (interest income plus capital appreciation and fees, if any) that appropriately recognizes potential investment risks.

We target investments that we perceive to be undervalued due to over leveraging or which operate in industries experiencing cyclical declines and may trade at discounts to their original issue prices. We source these transactions in the secondary markets and occasionally directly with issuers.

We seek to protect against loss of principal by investing in borrowers with tangible and intangible assets, where GECM believes asset values are expected to, or do, exceed our investment and any debt that is senior to, or ranks in parity with, our investment. GECM’s investment process includes a focus on an investment’s contractual documents, as it seeks to identify rights that enhance an investment’s risk protection and avoid contracts that compromise potential returns or recoveries. Although we intend to focus on senior debt instruments of middle-market companies, we may make investments throughout a company’s capital structure, including subordinated debt, mezzanine debt, and equity or equity-linked securities.

 

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Our Portfolio at June 30, 2018

The following table sets forth certain information as of June 30, 2018 regarding each portfolio company in which we have a debt or equity investment. For information regarding material portfolio transactions occurring after June 30, 2018, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.” Additional information about the general terms of our loans and other investments are described above under “Risk Factors” and “—Overview.” We offer to make available significant managerial assistance to our portfolio companies. We may receive rights to observe the meetings of our portfolio companies’ boards of directors or equivalent governing bodies. Other than these investments and any additional relationships described below with respect to a particular portfolio company, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments.

 

Portfolio Company

 

Security

  Industry     Interest  (1)     % of
Class
    Maturity     Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 

Investments at Fair Value - 221.75% of Net  Assets (2)

 

             

Controlled Investments - 16.25% of Net Assets (3)

 

             
PE Facility Solutions, LLC   1st Lien, Senior Secured Revolver (5),(15)    

Building Cleaning
and Maintenance
Services
 
 
 
   
11.09% (L
+ 9.00%) (6)
 
 
          02/27/2022       3,679     $ 3,679     $ 3,679       2.93
4217 Ponderosa Avenue Suite A, San Diego, CA 92123   1st Lien, Senior Secured Revolver - Unfunded (5),(15)      
11.09%
(L + 9.00%) (6)
 
 
          02/27/2022       2,321       —         —        
  1st Lien, Senior Secured Loan A (5),(15)      
13.09% (L +
11.00%) (6)
 
 
          02/27/2022       9,900       9,900       9,900       7.88
  1st Lien, Senior Secured Loan B (5),(15)      
16.09% (L +
14.00%) (6),(7)
 
 
          02/27/2022       6,171       5,897       5,187       4.13
  Common Equity (5),(8),(15)         83       1       —         —        
             

 

 

   

 

 

   

 

 

 
                19,476       18,766       14.94
             

 

 

   

 

 

   

 

 

 
The Finance Company   1st Lien, Senior Secured Revolver (5)     Consumer Finance      

13.09% (L +
11.00%, 11.50%
Floor) (6)
 
 
 
          07/02/2020       535       535       535       0.43
1010 Wayne Ave, Ste 510, Silver Springs, MD 20910   1st Lien, Senior Secured Unfunded Loan (5)      

13.09% (L +
11.00%, 11.50%
Floor) (6)
 
 
 
          07/02/2020       465       —         —        
  2nd Lien Secured Term Loan B (5)      

13.09% (L +
11.00%, 11.50%
Floor) (6)
 
 
 
          07/02/2020       1,491       1,491       1,108       0.88
  Equity (5),(8)         72       288,000       —         —        
             

 

 

   

 

 

   

 

 

 
                2,206       1,643       1.31
             

 

 

   

 

 

   

 

 

 
Total Controlled Investments

 

    21,502       20,409       16.25
           

 

 

   

 

 

   

 

 

 
Affiliate Investments - 33.43% of Net Assets (4)

 

           
Avanti Communications Group PLC   2nd Lien, Senior Secured Bond (10),(11)    

Wireless
Telecommunications
Services
 
 
 
    9.00%             10/01/2022       37,126       32,800       28,216       22.47
Cobham House 20 Black Friars Lane London, UK EC4V 6EB   Common Equity (8),(10)         9       196,086,410       50,660       13,734       10.93
             

 

 

   

 

 

   

 

 

 
                83,460       41,950       33.40
             

 

 

   

 

 

   

 

 

 
OPS Acquisitions Limited and Ocean Protection Services Limited   1st Lien, Senior Secured Loan (5),(10),(16)    
Maritime Security
Services
 
 
   

14.09% (L +
12.00%, 12.50%
Floor) (6),(9)
 
 
 
          06/01/2018       4,903       4,240       34       0.03
Capital place 120 Bath Road London, UK UB3 5AN   Common Equity (5),(8),(10),(16)         19       19       —         —        
             

 

 

   

 

 

   

 

 

 
                4,240       34       0.03
             

 

 

   

 

 

   

 

 

 
Total Affiliate Investments

 

    87,700       41,984       33.43
           

 

 

   

 

 

   

 

 

 

 

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Index to Financial Statements

Portfolio Company

 

Security

  Industry     Interest  (1)   % of
Class
    Maturity     Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 
Non-Control, Non-Affiliate Investments- 109.01% of Net Assets

 

             
Almonde, Inc. 2628 Maxwell Street Philadelphia, PA 19152   2nd Lien, Senior Secured Loan (10),(17)     Software Services     9.59% (L +
7.25%, 8.25%
floor) (13)
          06/13/2025       10,000       9,953       9,616       7.66
Aptean Holdings, Inc. 4325 Alexander Drive Suite 100 Alpharetta, GA 30022   2nd Lien, Senior Secured Loan (5),(29)     Software Services     11.84% (L +
9.50%, 10.50%
Floor) (13)
          12/02/2023       4,010       4,054       4,030       3.21
American Commercial Barge Line Company 1701 E. Market St. Jeffersonville, IN 47130   1st Lien, Senior Secured Loan (18)     Water Transport     10.84% (L +
8.75%, 9.75%
Floor) (6)
          11/12/2020       9,000       7,544       6,206       4.94
Davidzon Radio, Inc. 2508 Coney Island Avenue, 2nd Floor Brooklyn, NY 1122   1st Lien, Senior Secured Loan (5),(16)     Radio Broadcasting     15.09% (L +
10.00%, 11.00%
Floor) (6),(12)
          03/31/2020       9,471       9,047       8,869       7.06
Foresight Energy LP One Metropolitan Square 211 North Broadway, Suite 2600 St. Louis, MO 63102   1st Lien, Senior Secured Loan (27)     Oil, Gas & Coal     8.09% (L + 5.75%,
6.75% floor) (13)
          03/28/2022       4,647       4,594       4,611       3.67
Full House Resorts, Inc. 1980 Festival Plaza Dr., Suite 680 Las Vegas, NV 89135   1st Lien Senior Secured Note (5),(25)    
Gaming, Lodging &
Restaurants
 
 
  9.34% (L +
7.00%, 8.00%
floor) (13)
          02/02/2024       9,950       9,761       9,801       7.80
Geo Specialty Chemicals, Inc. 401 S Earl Ave # 3A, Lafayette, IN 47904   1st Lien, Senior Secured Revolver (5),(19)     Chemicals     6.84% (L +
4.75%, 5.75%
Floor) (6)
          04/30/2019       3,938       3,804       3,833       3.05
  1st Lien, Senior Secured Revolver -
Unfunded (5),(19)
    6.84% (L +
4.75%, 5.75%
Floor) (6)
          04/30/2019       438       —         (12     (0.01 )% 
  1st Lien, Senior Secured Loan (5),(19)     6.84% (L +
4.75%, 5.75%
Floor) (6)
          04/30/2019       5,906       5,726       5,750       4.58
             

 

 

   

 

 

   

 

 

 
                9,530       9,571       7.62
             

 

 

   

 

 

   

 

 

 
International Wire Group Inc 12 Masonic Avenue Camden, NY 13316   2nd Lien, Senior Secured Bond (11)     Manufacturing     10.75%           08/01/2021       17,500       16,476       16,450       13.10
Luling Lodging, LLC 4120 East Pierce Street Luling, TX 7864   1st Lien, Senior Secured Loan (5),(16)     Hotel Operator     19.09% (L +
12.00%, 12.25%
Floor) (6),(9),(12)
          12/18/2017       2,715       1,300       2,574       2.05
Michael Baker International, LLC 500 Grant Street, Suite 5400 Pittsburgh, PA 15219   2nd Lien, Senior Secured Bond (11)    
Industrial
Conglomerates
 
 
  8.75%           03/01/2023       14,500       14,044       14,138       11.26
NANA Development Corp. 909 West 9th Avenue Anchorage, AK 99501   1st Lien, Senior Secured Bond (11)     Industrial Other     9.50%           03/15/2019       3,308       3,284       3,316       2.64

 

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Portfolio Company

 

Security

  Industry     Interest  (1)     % of
Class
    Maturity     Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 
PEAKS Trust 2009-1 10 North High Street 400 West Chester, PA 19380   1st Lien, Senior Secured Loan (5),(10),(16)     Consumer Finance      

7.59% (L +
5.50%, 7.50%
Floor) (6)
 
 
 
          01/27/2020       1,242       942       805       0.64
PR Wireless, Inc.   1st Lien, Senior Secured Delayed Draw Loan (5),(20)    
Wireless
Communications
 
 
   
7.59% (L +
5.25%) (13)
 
 
          06/29/2020       274       274       275       0.22
Metro Office Park, 1st Street, Chrysler Building, Suite 300, Guaynabo, Puerto Rico, Puerto Rico   1st Lien, Senior Secured Unfunded Delayed Draw Loan (5),(20)      
7.59% (L +
5.25%) (13)
 
 
          06/29/2020       1,098       —         (3     (0.0 )% 
             

 

 

   

 

 

   

 

 

 
                274       272       0.22
             

 

 

   

 

 

   

 

 

 
RiceBran Technologies Corporation 2928 Ramco Street, Suite 120, West Sacramento, CA 95691   Warrants (5),(8),(16)     Grain Mill Products      
$1.60 Strike
Price
 
 
          05/12/2020       300,000       145       237       0.19
SESAC Holdco II LLC
55 Music Square East Nashville, TN 37203
  2nd Lien, Senior Secured Loan (5),(21)     Business Services      
9.34% (L +
7.25%) (6)
 
 
          02/24/2025       7,295       7,244       7,291       5.81
Sungard Availability Services Capital, Inc.   1st Lien, Senior Secured Loan (22)     Technology Services      

12.09% (L +
10.00%, 11.00%
Floor) (6)
 
 
 
          10/01/2022       8,880       8,565       8,729       6.95
680 East Swedesford Road Wayne, PA 19087   1st Lien, Senior Secured Loan (5),(24)      

9.09% (L +
7.00%, 8.00%
Floor) (6)
 
 
 
          9/30/2021       4,900       4,565       4,577       3.64
             

 

 

   

 

 

   

 

 

 
                13,130       13,306       10.59
             

 

 

   

 

 

   

 

 

 
Tallage Davis, LLC   1st Lien, Senior Secured Loan (5),(26)     Real Estate Services       11.00%             01/25/2023       3,100       3,100       3,083       2.45
165 Tremont Street, Suite 305, Boston, MA 02111   1st Lien, Senior Secured Loan – Unfunded (5),(26)       11.00%             01/26/2023       11,000       —         (61     (0.05 )% 
             

 

 

   

 

 

   

 

 

 
                3,100       3,022       2.40
             

 

 

   

 

 

   

 

 

 
Tallage Lincoln, LLC   1st Lien, Senior Secured Loan (5),(16)     Real Estate Services      

12.34% (L +
10.00%, 11.00%
Floor) (13)
 
 
 
          12/31/2019       4,298       4,299       4,279       3.41
165 Tremont Street, Suite 305, Boston, MA 02111   1st Lien, Senior Secured Loan – Unfunded (5),(16)      

12.34% (L +
10.00%, 11.00%
Floor) (13)
 
 
 
          12/31/2019       2,250       —         (10     (0.01 )% 
             

 

 

   

 

 

   

 

 

 
                4,299       4,269       3.40
             

 

 

   

 

 

   

 

 

 
The Selling Source, LLC 325 East Warm Springs Road # 200 Las Vegas, NV 89119   1st Lien, Senior Secured Loan (5),(16),(23)    
Information and
Data Services
 
 
   

17.00% (9.00%
PIK, 8.00%
Cash) (7),(9)
 
 
 
          12/31/2017       5,689       4,202       4,841       3.85
Tru Taj, LLC   1st Lien, Senior Secured Bond (11)     Retail       12.00%             08/15/2021       16,000       15,346       11,960       9.52
One Geoffrey Way Wayne, NJ 07470   1st Lien, Debtor in Possession Note (5),(28)       11.00%             01/22/2019       1,655       1,703       1,725       1.37
             

 

 

   

 

 

   

 

 

 
                17,049       13,685       10.90
             

 

 

   

 

 

   

 

 

 
Total Non-Control, Non-Affiliate Investments

 

    139,972       136,910       109.01
           

 

 

   

 

 

   

 

 

 

 

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Portfolio Company

 

Security

  Industry     Interest  (1)     % of
Class
    Maturity     Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 
Short-Term Investments – 63.06% of Net Assets                
State Street Institutional           <1          
Treasury Money Market Fund   Premier Class             4,531,772       4,532       4,532       3.61
United States Treasury 1500 Pennsylvania Avenue, NW Washington, D.C. 20220   Treasury Bill       1.90         75,000       74,666       74,658       59.45
             

 

 

   

 

 

   

 

 

 

Total Short-Term Investments

 

    79,198       79,190       63.06
           

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS (14) – 221.75% of Net Assets

 

  $ 328,372     $ 278,493       221.75
         

 

 

   

 

 

   

 

 

 

Other Liabilities in Excess of Assets – (121.75)% of Net Assets

 

    $ (152,902     (121.75 )% 

NET ASSETS

 

    $ 125,591       100.00
               

 

 

   

 

 

 

 

(1)

A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2018. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(2)

The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act.

(3)

‘‘Controlled Investments’’ are investments in those companies that are ‘‘Controlled Investments’’ of the Company, as defined in the Investment Company Act. A company is deemed to be a ‘‘Controlled Investment’’ of the Company if the Company owns more than 25% of the voting securities of such company.

(4)

‘‘Affiliate Investments’’ are investments in those companies that are ‘‘Affiliated Companies’’ of the Company, a defined in the Investment Company Act, which are not ‘‘Controlled Investments.’’ A company is deemed to be an ‘‘Affiliate’’ of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.

(5)

Investments classified as Level 3 whereby fair value was determined by the Company’s board of directors.

(6)

The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of June 30, 2018 was 2.09%.

(7)

Security pays, or has the option to pay, all of its interest in kind.

(8)

Non-income producing security.

(9)

Investment was on non-accrual status as of June 30, 2018.

(10)

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 19.43% were non-qualifying assets as of June 30, 2018.

(11)

Security exempt from registration pursuant to Rule 144A under the Securities Act. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.

(12)

The interest rate on these loans includes a default interest rate.

(13)

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of June 30, 2018 was 2.34%.

(14)

As of June 30, 2018, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $19,153; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $52,425; the net unrealized depreciation was $33,272; the aggregate cost of securities for Federal income tax purposes was $329,337.

(15)

Restricted security initially obtained on February 28, 2017.

(16)

Restricted security initially obtained on November 3, 2016.

(17)

Restricted security initially obtained on December 14, 2017.

(18)

Restricted security initially obtained on May 17, 2017.

(19)

Restricted security initially obtained on September 28, 2017.

(20)

Restricted security initially obtained on November 15, 2017.

(21)

Restricted security initially obtained on December 13, 2017.

(22)

Restricted security initially obtained on December 20, 2017.

(23)

Loan defaulted on January 1, 2018.

(24)

Restricted security initially obtained on January 24, 2018.

(25)

Restricted security initially obtained on February 2, 2018.

(26)

Restricted security initially obtained on March 20, 2018.

(27)

Restricted security initially obtained on March 22, 2018.

 

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(28)

Restricted security initially obtained on March 26, 2018.

(29)

Restricted security initially obtained on March 27, 2018.

    †

Investment is a debt investment and thus the percentage of class held does not apply.

Dollar amounts in thousands

L = LIBOR

Set forth below is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of June 30, 2018.

Avanti Communications Group plc

Avanti, located in London, UK, is a leading provider of satellite-enabled data communications services in Europe, the Middle East and Africa. Avanti’s network consists of: three high throughput satellites, HYLAS 1, HYLAS 2 and HYLAS 4; a multiband satellite, Artemis; one satellite that is not yet launched, HYLAS 3; and an international fiber network connecting data centers in several countries. Avanti’s satellites primarily operate in the Ka band frequency range. The Ka band allows for the delivery of greater capacity at faster speeds than Ku band capacity.

PE Facility Solutions, LLC

PEFS, located in San Diego, CA, provides facilities maintenance services to local and national commercial clients. PEFS manages, maintains and optimizes the performance of mission critical facilities for corporate real estate owners in nearly 100 million square feet of specialized buildings across North America. PEFS is headquartered in San Diego, California and has operations nationwide. Two members of our investment committee serve as members of the Board of Managers of PEFS.

International Wire Group, Inc.

International Wire Group, Inc. (“ITWG”) is headquartered in Camden, New York, and is the largest bare copper wire and copper wire products manufacturer in the United States with operations in Europe. ITWG’s products include a broad line of copper wire configurations and gauges with a variety of electrical and conductive characteristics, which are utilized by customers primarily in the industrial and energy, electronics and data communications, aerospace and defense, medical products, automotive, and consumer and appliance industries. In addition to its Camden headquarters, ITWG has multiple offices across the United States, as well as offices in France, Italy, and Poland.

Investment Manager and Administrator

GECM’s investment team has more than 100 years of experience in the aggregate financing and investing in leveraged middle-market companies. GECM’s team is led by Peter A. Reed, GECM’s Chief Investment Officer. Senior members of GECM’s team include Adam M. Kleinman, John S. Ehlinger and Adam W. Yates. The GECM investment team has deployed more than $17.0 billion into more than 550 issuers across 20+ jurisdictions during its prior and current experience together.

Investment Selection

GECM employs a team of investment professionals with experience in leveraged finance. The sector-focused research team performs fundamental research at both the industry and company level. Through in-depth industry coverage, GECM’s investment team seeks to develop a thorough understanding of the fundamental market, sector drivers, mergers and acquisition activity, security pricing and trading and new issue trends. GECM’s investment team believes that understanding industry trends is an important element of investment success.

 

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Idea Generation, Origination and Refinement

Idea generation and origination is maximized through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, as well as current and former clients, portfolio companies and investors. GECM’s investment team is expected to supplement these lead sources by also utilizing broader research efforts, such as attendance at prospective borrower industry conferences and an active calling effort to brokers and investment bankers. GECM’s investment team focuses their idea generation and origination efforts on middle-market companies. In screening potential investments, GECM’s investment team utilizes a value-oriented investment philosophy with analysis and research focused on the preservation of capital. GECM has identified several criteria that it believes are important in identifying and investing in prospective portfolio companies. GECM’s process requires focus on the terms of the applicable contracts and instruments perfecting security interests. GECM’s criteria provide general guidelines for GECM’s investment committee’s decisions; however, not all of these criteria will be met by each prospective portfolio company in which they choose to invest.

Asset Based Investments. Debt issued by firms with negative free cash flow but where GECM’s investment thesis is based on the value of the collateral or the issuer’s assets. This type of investment focuses on expected realizable value of the issuer’s assets.

Enterprise Value Investments. Debt issued by firms whose business generates free cash flow to service the debt with a margin of safety and the enterprise value of the firm represents the opportunity for principal to be repaid by refinancing or in connection with a merger or acquisition transaction. These investments focus on the going concern value of the enterprise.

Other Debt Investments. The issuer has the ability to pay interest and principal of its debt out of expected free cash flow from its business. These investments focus on the sustainability and defensibility of cash flows from the business.

Due Diligence

GECM’s due diligence typically includes:

 

   

analysis of the credit documents by GECM’s investment team (including the members of the team with legal training and years of professional experience). GECM will engage outside counsel when necessary as well;

 

   

review of historical and prospective financial information;

 

   

research relating to the company’s management, industry, markets, customers, products and services and competitors;

 

   

verification of collateral;

 

   

interviews with management, employees, customers and vendors of the potential portfolio company; and

 

   

informal or formal background and reference checks.

Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the diligence process present the opportunity to GECM’s investment committee, which then determines whether to pursue the potential investment.

Approval of Investment Transactions

GECM’s procedures call for each new investment under consideration by the GECM analysts to be preliminarily reviewed at periodic meetings of GECM’s investment team. GECM’s investment team then

 

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prepares a summary of the investment, including a financial model and risk cases and a legal review checklist. GECM’s investment committee then will hold a formal review meeting and following approval of a specific investment, authorization is given to GECM’s traders, including execution guidelines.

GECM’s investment analysts conduct periodic reviews of the positions for which they are responsible with members of GECM’s investment committee. On a quarterly basis, formal reviews of each position are conducted by GECM’s investment committee.

GECM’s investment analysts and members of the GECM investment committee will jointly decide when to sell a position. The sale decision will then be given to GECM’s traders, who will execute the trade in consultation with the analyst and the applicable member of GECM’s investment committee.

Ongoing Relationship with Portfolio Companies

As a BDC, we offer, and must provide upon request, significant managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.

GECM’s investment team monitors our portfolio companies on an ongoing basis. They monitor the financial trends of each portfolio company and its respective industry to assess the appropriate course of action for each investment. GECM’s ongoing monitoring of a portfolio company will include both a qualitative and quantitative analysis of the company and its industry.

Valuation Procedures

We value our assets, an essential input in the determination of our net asset value, consistent with GAAP and as required by the Investment Company Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” for an extended discussion of our methodology.

Staffing

We do not currently have any employees. Mr. Reed is our Chief Executive Officer and President and GECM’s Chief Investment Officer. Under the Administration Agreement, GECM provides the services of John J. Woods, our Chief Financial Officer and Treasurer, and Adam M. Kleinman, our Chief Compliance Officer and Secretary.

Competition

We compete for investments with other BDCs and investment funds (including private equity funds, hedge funds, mutual funds, mezzanine funds and small business investment companies), as well as traditional financial services companies such as commercial banks, direct lending funds and other sources of funding. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, those entities have begun to invest in areas they have not traditionally invested in, including making investments in the types of portfolio companies we target. Many of these entities have greater financial and managerial resources than we do.

Exemptive Relief

We intend to apply to the SEC for exemptive relief that will allow us to co-invest, together with other investment vehicles managed by GECM, in specific investment opportunities. We are unable to predict

 

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whether or not the SEC will grant the requested exemption. If the SEC does not provide the requested exemption, GECM will continue to allocate investment opportunities to different investment vehicles in accordance with its allocation policies.

Formation Transactions and Merger

On June 23, 2016, we entered into the Merger Agreement with Full Circle that provided for the Merger. Concurrent with delivery of the Merger Agreement, we entered into the Subscription Agreement with GEC and the MAST Funds. Per the Subscription Agreement, GEC contributed $30.0 million to us. Prior to the Merger and our election to be regulated as a BDC under the Investment Company Act, per the Subscription Agreement, we acquired the Initial GECC Portfolio from the MAST Funds. As a result of the transactions contemplated by the Subscription Agreement, the MAST Funds owned approximately 75% of our pre-Merger outstanding common stock and GEC owned 25% of our pre-Merger outstanding common stock. The Merger was completed on November 3, 2016.

Investment Management Agreement

Management Services

GECM serves as our investment adviser and is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board, GECM manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Investment Management Agreement, GECM:

 

   

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

 

   

identifies, evaluates and negotiates the structure of our investments (including performing due diligence on our prospective portfolio companies);

 

   

closes and monitors our investments; and

 

   

determines the securities and other assets that we purchase, retain or sell.

GECM was initially formed to provide investment advisory services to us. However, GECM’s services to us under the Investment Management Agreement are not exclusive, and GECM is free to furnish similar services to other entities.

Management & Incentive Fees

Under the Investment Management Agreement, GECM receives a fee from us, consisting of two components: (1) a base management fee and (2) an incentive fee.

The base management fee is calculated at an annual rate of 1.50% based on the average value of our total assets (determined under GAAP) (other than cash or cash equivalents but including assets purchased with borrowed funds or other forms of leverage) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.

The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the

 

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Administration Agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes any accretion of OID, market discount, PIK interest, PIK dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that we and our consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”).

Pre-incentive fee net investment income does not include any realized capital gains or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses.

Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined in accordance with GAAP) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 1.75% per quarter (7.00% annualized). If market interest rates rise, we may be able to invest in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for GECM to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.50% base management fee.

We pay the incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

   

no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate;

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized). We refer to this portion of our pre- incentive fee net investment income (which exceeds the hurdle rate but is less than 2.1875%) as the “catch-up” provision. The catch-up is meant to provide GECM with 20% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and

 

   

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

These calculations are adjusted for any share issuances or repurchases during the quarter. Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the “Accrued Unpaid Income Incentive Fees”) will be deferred, on a security-by-security basis, and will become payable only if, as, when and to the extent cash is received by us or our consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce pre-incentive fee net investment income and (2) reduce the amount deferred pursuant to the terms of the Investment Management Agreement. Subsequent payments of income incentive fees deferred pursuant to this paragraph do not reduce the amounts payable for any quarter pursuant to the other terms of the Investment Management Agreement.

 

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The following is a graphical representation of the calculation of the income related portion of the incentive fee:

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

(expressed as a percentage of the value of net assets)

 

 

LOGO

Percentage of pre-incentive fee net investment income

allocated to income related portion of incentive fee

These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.

The second part of the incentive fee, or the “Capital Gains Fee,” is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), commencing with the partial calendar year ended December 31, 2016, and is calculated at the end of each applicable year by subtracting (1) the sum of our and our consolidated subsidiaries’ cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our and our consolidated subsidiaries’ cumulative aggregate realized capital gains, in each case calculated from November 4, 2016. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year.

The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment. The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (1) the net sales price of each investment in our portfolio when sold is less than (2) the accreted or amortized cost basis of such investment. The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the fair value of each investment in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investment.

We will defer cash payment of any incentive fee otherwise payable to GECM in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative Pre-Incentive Fee Net Return during the most recent Trailing Twelve Quarters less (2) the aggregate incentive fees that were previously paid to GECM during such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid).

 

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Examples of Quarterly Incentive Fee Calculation

The following hypothetical calculations illustrate the calculation of net investment income based incentive fees under the Investment Management Agreement.

 

     Assumption 1     Assumption 2     Assumption 3  

Investment income (including interest, dividends, fees, etc.) (1)

     1.25     2.70     3.00

Hurdle rate (2)

     1.75     1.75     1.75

Management fee (3)

     0.38     0.38     0.38

Pre-incentive fee net income (net of management fee + other expenses) (4)

     0.68     2.125     2.425

Incentive fee

     0.00     0.38 % (5)(6)       0.485 % (6)(7)(8)  

 

(1)

The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.

(2)

Represents 7.0% annualized hurdle rate.

(3)

Represents 1.5% annualized management fee.

(4)

Excludes organizational and offering expenses. Other Expenses are assumed to be 0.19% in the examples.

(5)

100% x pre-incentive fee net income, subject to the “catch up” is calculated as 100% x (2.125% –1.75%)

(6)

The “catch-up” provision is intended to provide GECM with an incentive fee of 20% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.1875% in any calendar quarter.

(7)

The catch-up is calculated as 2.1875% – 1.75%= 0.4375%.

(8)

The incentive fee is calculated as (100% × 0.4375%) + (20% × (2.425% – 2.1875%)) = 0.475%. The total fee is the sum of 0.4375 (the catch-up) plus 0.0475% (20% of the excess over the hurdle rate).

The following hypothetical calculations illustrate the calculation of the Capital Gains Fee under the Investment Management Agreement.

 

     In millions  
     Assumption 1     Assumption 2  

Year 1 – Investment in Company A

   $ 20.00     $ 20.00  

Year 1 – Investment in Company B

   $ 30.00     $ 30.00  

Year 1 – Investment in Company C

     —       $ 25.00  

Year 2 – Proceeds from sale of investment in Company A

   $ 50.00     $ 50.00  

Year 2 – Fair market value (FMV) of investment in Company B

   $ 32.00     $ 25.00  

Year 2 – FMV of investment in Company C

     —       $ 25.00  

Year 3 – FMV of investment in Company B

   $ 25.00     $ 24.00  

Year 3 – Proceeds from sale of investment in Company C

     —       $ 30.00  

Year 4 – Proceeds from sale of investment in Company B

   $ 31.00       —    

Year 4 – FMV of investment in Company B

     —       $ 35.00  

Year 5 – Proceeds from sale of investment in Company B

     —       $ 20.00  

Capital gains portion of the incentive fee:

    

Year 1

   $ 0     $ 0  

Year 2

   $ 6.0 (1)       $ 5.0 (4)    

Year 3

   $ 0 (2)       $ 0.8 (5)    

Year 4

   $ 0.2 (3)       $ 1.2 (6)    

Year 5

     —       $ 0 (7)    

 

(1)

$30.0 million realized capital gain on sale of Investment A multiplied by 20%.

 

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(2)

The greater of (i) zero and (ii) $5.0 million (20% multiplied by ($30.0 million cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (capital gain fee paid in Year 2).

(3)

$6.2 million ($31.0 million cumulative realized capital gains multiplied by 20%) less $6.0 million (capital gain fee paid in Year 2).

(4)

20% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million unrealized capital depreciation on Investment B).

(5)

$5.8 million (20% multiplied by $29.0 million ($35.0 million cumulative realized capital gains less $6.0 million unrealized capital depreciation)) less $5.0 million Capital Gains Fee paid in Year 2.

(6)

$7.0 million (20% multiplied by $35.0 million ($35.0 million cumulative realized capital gains)) less $5.8 million cumulative Capital Gains Fee paid in Year 2 and Year 3.

(7)

Greater of (i) zero and (ii) $5.0 million (20% multiplied by $25 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $7.0 million cumulative Capital Gains Fee paid in Year 2, Year 3, and Year 4.

As illustrated in Year 3 of Assumption 1 above, if GECC were to be wound up on a date other than December 31 of any year, we may have paid aggregate capital gain incentive fees that are more than the amount of such fees that would be payable if GECC had been wound up on December 31 of such year.

For the year ended December 31, 2017, we incurred $2.3 million in base management fees and $4.4 million in income based incentive fees accrued during the period. Accrued Unpaid Income Incentive Fees in the amount of $4.0 million were deferred in accordance with the Investment Management Agreement. There was no Capital Gains Fee earned by GECM as calculated under the Investment Management Agreement for the year ended December 31, 2017 because our cumulative net realized gains were offset by the realized losses due to purchase accounting in the Merger.

For the period ended December 31, 2016, we incurred $0.4 million in base management fees and $0.9 million in income based incentive fees accrued during the period. Accrued Unpaid Income Incentive Fees in the amount of $0.8 million were deferred in accordance with the Investment Management Agreement. There was no Capital Gains Fee earned by GECM as calculated under the Investment Management Agreement for the period ended December 31, 2016 because our cumulative net realized gains were offset by the realized losses due to purchase accounting in the Merger.

Payment of Expenses

The services of all investment professionals and staff of GECM, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by GECM. We bear all other costs and expenses of our operations and transactions, including (without limitation):

 

   

our organizational expenses;

 

   

fees and expenses, including reasonable travel expenses, actually incurred by GECM or payable to third parties related to our investments, including, among others, professional fees (including the fees and expenses of counsel, consultants and experts) and fees and expenses relating to, or associated with, evaluating, monitoring, researching and performing due diligence on investments and prospective investments (including payments to third party vendors for financial information services);

 

   

out-of-pocket fees and expenses, including reasonable travel expenses, actually incurred by GECM or payable to third parties related to the provision of managerial assistance to our portfolio companies that we agree to provide such services to under the Investment Company Act (exclusive of the compensation of any investment professionals of GECM);

 

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interest or other costs associated with debt, if any, incurred to finance our business;

 

   

fees and expenses incurred in connection with our membership in investment company organizations;

 

   

brokers’ commissions;

 

   

investment advisory and management fees;

 

   

fees and expenses associated with calculating our net asset value (including the costs and expenses of any independent valuation firm);

 

   

fees and expenses relating to offerings of our common stock and other securities;

 

   

legal, auditing or accounting expenses;

 

   

federal, state and local taxes and other governmental fees;

 

   

the fees and expenses of GECM, in its role as the administrator, and any sub-administrator, our transfer agent or sub-transfer agent, and any other amounts payable under the Administration Agreement, or any similar administration agreement or sub-administration agreement to which we may become a party;

 

   

the cost of preparing stock certificates or any other expenses, including clerical expenses of issue, redemption or repurchase of our securities;

 

   

the expenses of and fees for registering or qualifying our common stock for sale and of maintaining our registration and registering us as a broker or a dealer;

 

   

the fees and expenses of our directors who are not interested persons (as defined in the Investment Company Act);

 

   

the cost of preparing and distributing reports, proxy statements and notices to stockholders, the SEC and other governmental or regulatory authorities;

 

   

costs of holding stockholders’ meetings;

 

   

listing fees;

 

   

the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by our charter or bylaws insofar as they govern agreements with any such custodian;

 

   

any amounts payable under the Administration Agreement;

 

   

our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

   

our allocable portion of the costs associated with maintaining any computer software, hardware or information technology services (including information systems, Bloomberg or similar terminals, cyber security and related consultants and email retention) that are used by us or by GECM or its respective affiliates on our behalf (which allocable portion shall exclude any such costs related to investment professionals of GECM providing services to us);

 

   

direct costs and expenses incurred by us or GECM in connection with the performance of administrative services on our behalf, including printing, mailing, long distance telephone, cellular phone and data service, copying, secretarial and other staff, independent auditors and outside legal costs;

 

   

all other expenses incurred by us or GECM in connection with administering our business (including payments under the Administration Agreement) based upon our allocable portion of GECM’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs (including reasonable travel expenses); and

 

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costs incurred by us in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with our business and the amount of any judgment or settlement paid in connection therewith, or the enforcement of our rights against any person and indemnification or contribution expenses payable by us to any person and other extraordinary expenses not incurred in the ordinary course of our business.

Pursuant to a reimbursement provision of the Administration Agreement, GECM agreed that the aggregate amount of expenses accrued for reimbursement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for us, including the fees charged by any sub-administrator to provide such personnel to us for the twelve months ending November 3, 2017, when taken together with such expenses reimbursed or accrued for reimbursement by us pursuant to the Administration Agreement during such period, shall not exceed 0.50% of our average net asset value during such period. Our expenses did not exceed the cap for the period, and as such no reimbursement was required under the agreement.

Duration and Termination

Our Board approved the Investment Management Agreement on August 8, 2016, and our stockholders approved the Investment Management Agreement on August 8, 2016. Unless terminated earlier, the Investment Management Agreement will continue in effect until September 27, 2018, and will renew for successive annual periods thereafter if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not “interested persons.” The Investment Management Agreement will automatically terminate if it is assigned. The Investment Management Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other.

Conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation. Except in limited circumstances, any change to the Investment Management Agreement must be submitted to stockholders for approval under the Investment Company Act and we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the Investment Management Agreement.

Indemnification

We agreed to indemnify GECM, its stockholders and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with it, to the fullest extent permitted by law, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as our investment adviser.

Organization of the Investment Adviser

GECM is a Delaware corporation and is registered as an investment adviser under the Advisers Act. GECM’s principal executive offices are located at 800 South Street, Suite 230, Waltham, Massachusetts 02453.

Regulation as a Business Development Company

We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the

 

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Investment Company Act. A majority of the outstanding voting securities of a company is defined under the Investment Company Act as the lesser of:

 

   

67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or

 

   

more than 50% of the outstanding voting securities of such company.

A majority of our directors must be persons who are not interested persons, as that term is defined in the Investment Company Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 150%. We may also be prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

We are generally unable to sell our common stock at a price below net asset value per share. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage. We may, however, sell our common stock at a price below net asset value per share:

 

   

in connection with a rights offering to our existing stockholders,

 

   

with the consent of the majority of our common stockholders, or

 

   

under such other circumstances as the SEC may permit.

For example, we may sell our common stock at a price below the then current net asset value of our common stock if our Board determines that such sale is in our and our stockholders’ best interests, and our stockholders approve our policy and practice of making such sales. In any such case, under such circumstances, the price at which our common stock may be the fair value of such common stock. We may be examined by the SEC for compliance with the Investment Company Act.

We may not acquire any assets other than “qualifying assets” unless, at the time we make such acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:

 

   

securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company;

 

   

securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants or rights relating to such securities; and

 

   

cash, cash items, government securities or high quality debt securities (within the meaning of the Investment Company Act), maturing in one year or less from the time of investment.

An eligible portfolio company is generally a domestic company that is not an investment company (other than a small business investment company wholly owned by a BDC) and that:

 

   

does not have a class of securities with respect to which a broker may extend margin credit at the time the acquisition is made;

 

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is controlled by the BDC and has an affiliate of the BDC on its board of directors;

 

   

does not have any class of securities listed on a national securities exchange;

 

   

is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250.0 million; or

 

   

meets such other criteria as may be established by the SEC.

Control, as defined by the Investment Company Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company.

In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a BDC.

To include certain securities described above as qualifying assets for the purpose of the 70% test, a BDC must offer to the issuer of those securities managerial assistance such as providing guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide managerial assistance to our portfolio companies.

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which are referred to, collectively, as temporary investments, so that 70% of our assets, as applicable, are qualifying assets. We make purchases that are consistent with our purpose of making investments in securities described in paragraphs 1 through 3 of Sec. 55(a) of the Investment Company Act. We will invest in U.S. Treasury bills or in repurchase agreements that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit.

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, if our asset coverage, as defined in the Investment Company Act, is at least equal to 150% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of our common stock unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary purposes without regard to asset coverage.

We and GECM have each adopted a code of ethics pursuant to Rule 17j-1 under the Investment Company Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain transactions by our or GECM’s personnel, respectively. Our and GECM’s codes of ethics generally do not permit investments by our or GECM’s employees, as applicable, in securities that may be purchased or held by us or GECM, as applicable. You may read and copy these codes of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, each code of ethics is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may

 

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also obtain copies of the codes of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

Proxy Voting Policies and Procedures

We have delegated our proxy voting responsibility to GECM. The Proxy Voting Policies and Procedures of GECM are set forth below. The guidelines are reviewed periodically by GECM and our non-interested directors, and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below, “we,” “our” and “us” refers to GECM.

Introduction

As an investment adviser registered under the Advisers Act, GECM has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, GECM recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.

These policies and procedures for voting proxies for GECM’s investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.

Proxy Policies

GECM votes proxies relating to our portfolio securities in what it perceives to be the best interest of its clients. GECM reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by its clients. Although GECM generally votes against proposals that may have a negative impact on its clients’ portfolio securities, GECM may vote for such a proposal if there exists compelling long-term reasons to do so.

GECM proxy voting decisions are made by the senior officers who are responsible for monitoring each of its clients’ investments. To ensure that our vote is not the product of a conflict of interest, GECM requires that: (i) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

Proxy Voting Records

You may obtain information about how GECM voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, Massachusetts 02453.

Material Federal Income Tax Matters

We elected to be taxed as a RIC beginning with our tax year that began on October 1, 2016 and ended on December 31, 2016, and we intend to continue to qualify to be taxed as a RIC under the Code. To continue to qualify as a RIC, we must, among other things, (a) derive in each taxable year at least 90% of our gross income from dividends, interest (including tax-exempt interest), payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including but not limited to gain from options, futures and forward contracts) derived with respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership” (a “QPTP”); and (b) diversify our holdings so that, at

 

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the end of each quarter of each taxable year (i) at least 50% of the market value of our total assets is represented by cash and cash items, U.S. Government securities, the securities of other RICs and other securities, with other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of our total assets and not more than 10% of the outstanding voting securities of such issuer (subject to the exception described below), and (ii) not more than 25% of the market value of our total assets is invested in the securities (other than U.S. Government securities and the securities of other RICs) (A) of any issuer, (B) of any two or more issuers that we control and that are determined to be engaged in the same business or similar or related trades or businesses, or (C) of one or more QPTPs. We may generate certain income that might not qualify as good income for purposes of the 90% annual gross income requirement described above. We will monitor our transactions to endeavor to prevent our disqualification as a RIC.

If we fail to satisfy the 90% annual gross income requirement or the asset diversification requirements discussed above in any taxable year, we may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the asset diversification requirements where we correct the failure within a specified period. If the applicable relief provisions are not available or cannot be met, all of our income would be subject to corporate-level U.S. federal income tax as described below. We cannot provide assurance that we would qualify for any such relief should we fail the 90% annual gross income requirement or the asset diversification requirements discussed above.

As a RIC, in any taxable year with respect to which we timely distribute at least 90% of the sum of:

 

   

our investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gain over net long-term capital loss and other taxable income (other than any net capital gain), reduced by deductible expenses) determined without regard to the deduction for dividends and distributions paid; and

 

   

net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) (the “Annual Distribution Requirement”).

We (but not our stockholders) generally will not be subject to U.S. federal income tax on investment company taxable income and net capital gain (generally, net long-term capital gain in excess of short-term capital loss) that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income on a timely basis.

To the extent that we retain our net capital gain for investment or any investment company taxable income, we will be subject to U.S. federal income tax at the regular corporate income tax rates. We may choose to retain our net capital gains for investment or any investment company taxable income, and pay the associated federal corporate income tax, including the federal excise tax described below.

Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement (the “Excise Tax Avoidance Requirement”) are subject to a nondeductible 4% U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:

 

   

at least 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year;

 

   

at least 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year); and

 

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certain undistributed amounts from previous years on which we paid no U.S. federal income tax.

While we generally intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. For example, we may be required to recognize OID interest for U.S. federal income tax purposes, which may involve the recognition of distributable income without a corresponding receipt of cash (“phantom income”). Our Board may determine that it is in our stockholders’ best interest for us to pay tax on such phantom income rather that borrow or liquidate portfolio positions to fund a cash distribution to stockholders of such amounts to avoid imposition of the excise tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

If, in any particular taxable year, we do not satisfy the Annual Distribution Requirement or were to fail to qualify as a RIC (for example, because we fail the 90% annual gross income requirement described above), and relief is not available as discussed above, all of our taxable income (including our net capital gains) will be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and distributions generally will be taxable to the stockholders as ordinary dividends to the extent of our current and accumulated earnings and profits.

We may decide to be taxed as a regular corporation even if we would otherwise qualify as a RIC if we determine that treatment as a corporation for a particular year would be in our best interests.

If we realize a net capital loss, the excess of our net short-term capital loss over our net long-term capital gain is treated as a short-term capital loss arising on the first day of our next taxable year and the excess of our net long-term capital loss over our net short-term capital gain is treated as a long-term capital loss arising on the first day of our next taxable year. If future capital gain is offset by carried forward capital losses, such future capital gain is not subject to fund-level U.S. federal income tax, regardless of whether they are distributed to stockholders. Accordingly, we do not expect to distribute any such offsetting capital gain. A RIC cannot carry back or carry forward any net operating losses.

Our Investments

Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things:

 

   

disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction;

 

   

convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-term capital gain or ordinary income;

 

   

convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited);

 

   

cause us to recognize income or gain without a corresponding receipt of cash,

 

   

adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur;

 

   

adversely alter the characterization of certain complex financial transactions; and

 

   

produce income that will not qualify as “good income” for purposes of the 90% annual gross income requirement described above.

 

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We will monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities (even if it is not advantageous to dispose of such securities) to mitigate the effect of these rules and prevent disqualification of us as a RIC.

Investments we make in securities issued at a discount or providing for deferred interest or PIK interest are subject to special tax rules that will affect the amount, timing and character of distributions to stockholders. For example, with respect to securities issued at a discount, we will generally be required to accrue daily as income a portion of the discount and to distribute such income on a timely basis each year to maintain our qualification as a RIC and to avoid U.S. federal income and excise taxes. Since in certain circumstances we may recognize income before or without receiving cash representing such income, we may have difficulty making distributions in the amounts necessary to satisfy the requirements for maintaining RIC status and for avoiding U.S. federal income and excise taxes. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thereby be subject to corporate-level U.S. federal income tax.

Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work out, modify or otherwise restructure our investment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any such restructuring may also result in our recognition of a substantial amount of non-qualifying income for purposes of the 90% gross income requirement or our receiving assets that would not count toward the asset diversification requirements.

Gain or loss recognized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.

If we invest in foreign securities, we may be subject to withholding and other foreign taxes with respect to those securities. Stockholders will generally not be entitled to claim a U.S. foreign tax credit or deduction with respect to foreign taxes paid by us.

If we acquire stock in a “passive foreign investment company” (a “PFIC”), we may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such stock even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we can elect to mark-to-market at the end of each taxable year our common stock in a PFIC; in this case, we will recognize as ordinary income any increase in the value of such common stock, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Our ability to make either election will depend on factors beyond our control. Under either election, we may be required to recognize in a year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.

If we hold 10% or more of the voting shares in or the value of a foreign corporation that is treated as a controlled foreign corporation (“CFC”), we may be required to include in our gross income our pro rata share of such CFC’s “subpart F income” and “global intangible low-taxed income” whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be

 

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classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Stockholders. A U.S. Stockholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of or 10% or more of the value of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.

Although the Code generally provides that income inclusions from QEFs and deemed distributions of subpart F income and global intangible low-taxed income from CFCs will be “good income” for purposes of the 90% gross income requirement to the extent such income is distributed to a RIC in the year it is included in the RIC’s income, the Code does not specifically provide whether income inclusions from a QEF or deemed distributions from a CFC during the RIC’s taxable year with respect to which no distribution is received would be “good income” for the 90% gross income requirement. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and deemed distributions from a CFC included in a RIC’s income would constitute “good income” for purposes of the 90% gross income requirement. The Department of the Treasury, however, has proposed regulations that would treat such income as not being “good income” for purposes of the 90% gross income requirement. In its explanation accompanying the proposed regulations, the Department of the Treasury takes the position that, notwithstanding prior private letter rulings to the contrary, the current language of the Code would treat such income as not being “good income” for purposes of the 90% gross income requirement even in the absence of the proposed regulations. Accordingly, such income may not be treated as “good income” if the proposed regulations are finalized or if the Department of the Treasury’s interpretation of current law applies. In such a case, we may fail to qualify as a RIC if we realize a material amount of such income.

Our functional currency is the U.S. dollar for U.S. federal income tax purposes. Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

If we borrow money, we may be prevented by loan covenants from declaring and paying dividends in certain circumstances. Limits on our payment of dividends may prevent us from meeting the Annual Distribution Requirement, and may, therefore, jeopardize our qualification for taxation as a RIC, or subject us to the 4% excise tax.

Even if we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements, under the Investment Company Act, we are not permitted to make distributions to our stockholders while our debt obligations and senior securities are outstanding unless certain “asset coverage” tests are met. This may also jeopardize our qualification for taxation as a RIC or subject us to the 4% excise tax.

Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and (2) other requirements relating to our status as a RIC, including the asset diversification requirements. If we dispose of assets to meet the Annual Distribution Requirement, the asset diversification requirements, or the 4% excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

Some of the income that we might otherwise earn, such as lease income, management fees, or income recognized in a work-out or restructuring of a portfolio investment, may not satisfy the 90% gross

 

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income requirement. To manage the risk that such income might disqualify us as a RIC for a failure to satisfy the 90% gross income requirement, one or more of our subsidiaries treated as U.S. corporations for U.S. federal income tax purposes may be employed to earn such income. Such corporations will be required to pay U.S. corporate income tax on their earnings, which ultimately will reduce the yield to our stockholders on such income and fees.

Failure to Qualify as a RIC

If we were unable to qualify for treatment as a RIC, and relief is not available as discussed above, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders nor would we be required to make distributions for tax purposes. Distributions would generally be taxable to our stockholders as ordinary dividend income eligible for reduced maximum rates for non-corporate stockholders to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. If we were to fail to meet the RIC requirements for more than two consecutive years and then to seek to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special election to pay corporate level tax on any such unrealized appreciation recognized during the succeeding five-year period.

Administration Agreement

Our Board approved the Administration Agreement on August 8, 2016. Pursuant to the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record-keeping services at such office facilities and other such services as the Administrator. Under the Administration Agreement, GECM will, from time to time, provide, or otherwise arrange for the provision of, other services GECM determines to be necessary or useful to perform its obligations under the Administration Agreement, including retaining the services of financial, compliance, accounting and administrative personnel that perform services on our behalf, including personnel to serve as our Chief Financial Officer and Chief Compliance Officer. Under the Administration Agreement, GECM also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, GECM assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments made by us to GECM under the Administration Agreement are equal to an amount based upon our allocable portion of GECM’s overhead in performing its obligations under the Administration Agreement, including our allocable portion of the cost of our officers (including our Chief Compliance Officer, Chief Financial Officer, Secretary and Treasurer) and their respective staffs. Our Board reviews the methodology employed in determining how the expenses are allocated to us. Our Board assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our Board considers whether any third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our Board compares the total amount paid to GECM for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

 

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We bear all costs and expenses that are incurred in our operation and transactions and not specifically assumed by GECM pursuant to the Investment Management Agreement. To the extent that GECM outsources any of its functions, we will reimburse GECM for the fees associated with such functions without profit or benefit to GECM. GECM agreed that the aggregate amount of expenses accrued for reimbursement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for us, including the fees charged by any sub-administrator to provide such personnel to us for the twelve months ending November 4, 2017, when taken together with such expenses reimbursed or accrued for reimbursement by us pursuant to the Administration Agreement during such period, shall not exceed 0.50% of our average net asset value during such period.

The Administration Agreement provides that, to the fullest extent permitted by law, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from or otherwise based upon the rendering of GECM’s services under the Administration Agreement or otherwise as our administrator.

Great Elm License Agreement

We entered into a license agreement with GEC pursuant to which GEC granted us a non-exclusive, royalty-free license to use the name “Great Elm Capital Corp.” Under the license agreement, we have a right to use the Great Elm Capital Corp. name and the Great Elm Capital logo for so long as GECM, or an affiliate thereof, remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Great Elm Capital Corp.” name. The license agreement may also be terminated by either party without penalty upon 60 days’ written notice to the other.

Brokerage Allocation and Other Practices

GECM does not expect to execute our transactions through any particular broker or dealer, but it plans to seek to obtain the best net results for us taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While GECM will generally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, GECM may select a broker based partly upon brokerage or research services provided to GECM, us or GECM’s other clients. In return for such services, we may pay a higher commission than other brokers would charge if we or GECM determines in good faith that such commission is reasonable in relation to the services provided.

Properties

Our executive offices are located at 800 South Street, Suite 230, Waltham, Massachusetts 02453, and are provided by GECM in accordance with the terms of the Administration Agreement.

Legal Proceedings

From time to time, we, our investment adviser or administrator may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies.

We are named as a defendant in a lawsuit captioned Intrepid Investments, LLC v. London Bay Capital, which is pending in the Delaware Court of Chancery. This lawsuit was brought by a member of Selling

 

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Source, LLC, one of our portfolio investments, against various members of and lenders to Selling Source. The plaintiff asserts claims of aiding and abetting, breaches of fiduciary duty, and tortious interference against us. As of June 30 2018, we held $5.69 million in principal amount, or approximately 6%, of Selling Source’s outstanding senior bank debt. The lawsuit was filed on March 5, 2016 and the plaintiff immediately agreed to stay the action in light of an ongoing mediation among parties other than us. In June 2018, Intrepid sent notice to the court and defendants effectively lifting the stay and triggering defendants’ obligation to respond to the Intrepid complaint. In September 2018, we joined the other defendants in a motion to dismiss on various grounds. We intend to continue to monitor the matter and will assess the need to defend the matter further as necessary.

We were named in two related complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al, filed on September 23, 2016 (the “Saunders Action”), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the “Russell Action”), in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the “Circuit Court”), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the “Speiser Action”, and together with the Russell Action, the “State Court Actions”) (the State Court Actions, together with the Saunders Action, the “Actions”).

On October 24, 2016, we, along with Full Circle, GECC, MAST Capital, certain directors of Full Circle and the plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and GECC agreed to and did make the supplemental disclosures with respect to the Merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the merger agreement between GECC and Full Circle; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. In March 2018, the Saunders Action was voluntarily dismissed by the plaintiff without prejudice. In August 2018, the State Court Actions were dismissed by the Circuit Court without prejudice for failure to prosecute.

In July 2016, Full Circle filed suit in the District Court of Caldwell County, Texas against, among others, Willis Pumphrey for breach of a guaranty agreement arising from a loan transaction with Full Circle. Dr. Pumphrey, a personal guarantor of the loan made by Full Circle, our predecessor in interest, brought counterclaims in (i) the District Court of Caldwell County, Texas and (ii) the District Court of Harris County, Texas against, among others, Justin Bonner, an employee of GECM, in each case, alleging breach of a confidentiality agreement and tortious interference with Dr. 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 in the District Court of Harris County, Texas. In November 2016, Dr. Pumphrey voluntarily withdrew his complaint without prejudice against Full Circle in the District Court of Caldwell County, Texas. On November 29, 2017, Mr. Pumphrey refiled his claims in the District Court of Harris County, Texas naming Full Circle, MAST Capital, GECC and GECM as defendants. Dr. Pumphrey is seeking between $2 million and $6 million in damages. GECC believes Dr. Pumphrey’s claims to be frivolous and intends to vigorously defend them. Furthermore, we continue to pursue our initial claims against Dr. Pumphrey in the District Court of Caldwell County, Texas, and the Caldwell County judge recently ruled in our favor in an amount of $4.1 million.

 

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In September 2018, we, the other lenders, and the lender trustee under PEAKS Trust 2009-1, were named as defendants in a claim brought by the chapter 7 trustee in the ITT Educational Services bankruptcy. We are continuing to monitor this matter.

Custodian and Transfer Agent

Our securities and a portion of our cash is held in safekeeping by State Street Bank and Trust Company located at 100 Huntington Avenue, Boston, Massachusetts 02116. American Stock Transfer & Trust Company, LLC acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 6201 15th Avenue, Brooklyn, NY 11219.

Our Common Stock

Our Common Stock is traded on Nasdaq under the symbol “GECC.” The following table sets forth the range of high and low sales prices of our common stock as reported on Nasdaq, our net asset value per share for each fiscal quarter since our common stock began trading in the public markets on November 7, 2016 and the sales price as a premium (discount) to our net asset value per share as reported on Nasdaq. The last reported sales price of our common stock on September 27, 2018 was $9.89 per share. As of September 27, 2018, we had 12 stockholders of record.

 

         

 

Price Range

    High Sales
Price
    Low Sales
Price
 
    NAV (1)     High     Low     Premium
(Discount) to
NAV (2)
    Premium
(Discount) to
NAV (2)
 

Fiscal 2018

         

Third quarter (through September 27, 2018)

    *     $ 10.07     $ 9.18       *       *  

Second quarter

  $ 11.79     $ 9.70     $ 9.11       (18 )%      (23 )% 

First quarter

  $ 11.79     $ 10.45     $ 8.90       (11 )%      (25 )% 

Fiscal 2017

         

Fourth quarter

  $ 12.42     $ 10.48     $ 8.76       (15 )%      (29 )% 

Third quarter

  $ 12.38     $ 11.30     $ 10.46       (9 )%      (16 )% 

Second quarter

  $ 13.29     $ 11.55     $ 10.25       7     (5 )% 

First quarter

  $ 13.59     $ 11.82     $ 10.74       (13 )%      (21 )% 

Fiscal 2016

         

Fourth quarter (beginning November 7, 2016)

  $ 13.52     $ 11.90     $ 10.35       (12 )%      (23 )% 

 

(1)

Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding common stock at the end of the relevant quarter.

(2)

Calculated by taking the respective high or low sales price, dividing it by net asset value (in each case, as of the end of the applicable quarter), and subtracting 1 from the result.

*

Net asset value has not been calculated for this period.

Privacy Principles

We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not

 

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disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).

We restrict access to nonpublic personal information about our stockholders to employees of GECM and its affiliates with a legitimate business need for the information. We intend to maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.

Distributions

We offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we have any senior securities (such as the Notes) outstanding, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the Investment Company Act or if distributions are limited by the terms of any of our borrowings.

 

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The following table lists the cash distributions, including dividends and returns of capital, if any, per share that we have declared since our formation on April 22, 2016.

 

Date Declared

   Record Date      Payment Date      Per Share Amount  

Fiscal 2018:

        

November 2, 2017

     January 31, 2018        February 15, 2018      $ 0.083  

November 2, 2017

     February 28, 2018        March 15, 2018        0.083  

November 2, 2017

     March 30, 2018        April 16, 2018        0.083  

March 9, 2018

     April 30, 2018        May 15, 2018        0.083  

March 9, 2018

     May 31, 2018        June 15, 2018        0.083  

March 9, 2018

     June 29, 2018        July 16, 2018        0.083  

May 3, 2018

     July 31, 2018        August 15, 2018        0.083  

May 3, 2018

     August 31, 2018        September 14, 2018        0.083  

May 3, 2018

    
September 28,
2018
 
 
     October 15, 2018        0.083  

August 8, 2018

     October 31, 2018        November 15, 2018        0.083  

August 8, 2018

    
November 30,
2018
 
 
     December 14, 2018        0.083  

August 8, 2018

     December 31, 2018        January 15, 2019        0.083  
        

 

 

 

Total 2018

         $ 0.996  
        

 

 

 

Fiscal 2017:

        

December 22, 2016

     January 31, 2017        February 16, 2017      $ 0.083  

December 22, 2016

     February 28, 2017        March 15, 2017        0.083  

December 22, 2016

     March 31, 2017        April 17, 2017        0.083  

March 22, 2017

     April 28, 2017        May 15, 2017        0.083  

March 22, 2017

     May 31, 2017        June 15, 2017        0.083  

March 22, 2017

     June 30, 2017        July 14, 2017        0.083  

May 11, 2017

     July 31, 2017        August 15, 2017        0.083  

May 11, 2017

     August 31, 2017        September 15, 2017        0.083  

May 11, 2017

    
September 29,
2017
 
 
     October 13, 2017        0.083  

August 8, 2017

     October 31, 2017        November 15, 2017        0.083  

August 8, 2017

    
November 30,
2017
 
 
     December 15, 2017        0.083  

August 8, 2017

     December 29, 2017        January 16, 2018        0.083  

December 26, 2017

     December 29, 2017        January 30, 2018        0.200  
        

 

 

 

Total 2017

         $ 1.196  
        

 

 

 

Fiscal 2016:

        

December 22, 2016

     December 30, 2016        January 16, 2017      $ 0.166  
        

 

 

 

Total 2016

         $ 0.166  
        

 

 

 

To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a taxable return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains.

During the year ended December 31, 2017, our distributions were made primarily from undistributed net investment income. We may not be able to achieve operating results that will allow us to make

 

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distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the Investment Company Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment.

Issuer Purchases of Shares

In the prospectus for the Merger, we announced that we would initiate a stock buyback program in an aggregate amount of $15.0 million. Our Board subsequently increased the overall size of the stock buyback program by a further $35.0 million. During the year ended December 31, 2017 we purchased an aggregate of 2,138,479 shares in a tender offer and through our stock buyback program at a weighted average price of $11.20 per share. As of June 30, 2018, we had cumulatively purchased 2,236,651 shares under the tender offer and stock buyback program at a weighted average price of $11.18 per share, resulting in $15.0 million of cumulative cash paid, under the program since November 4, 2016. Including the tender offer, we utilized $25.0 million under our stock buyback and tender program for repurchasing common stock.

 

Month    Total Number of
Shares Purchased
     Average Price Per
Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans  or
Program
     Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet  Be Purchased
Under the Plans or
Programs
(Amounts in dollars)
 

January 2017

     132,434      $ 11.48        132,434      $ 12,425,611  

February 2017

     72,678      $ 11.26        72,678      $ 11,607,509  

March 2017

     40,617      $ 11.09        40,617      $ 11,157,069  

April 2017

     16,846      $ 11.38        16,846      $ 10,965,351  

May 2017 (1)

     944,535      $ 11.44        944,535      $ 10,158,772  

June 2017

     15,215      $ 10.42        15,215      $ 10,000,182  

July 2017

     47,961      $ 10.73        47,961      $ 9,485,725  

August 2017

     37,666      $ 10.78        37,666      $ 9,079,585  

September 2017

     753,097      $ 11.00        753,097      $ 792,735  

October 2017

     65,945      $ 10.27        65,945      $ 115,277  

November 2017

     11,485      $ 10.04        11,485      $ —    
  

 

 

    

 

 

    

 

 

    

Total 2017

     2,138,479      $ 11.20        2,138,479     

November 2016

     16,030      $ 10.79        16,030      $ 14,826,985  

December 2016

     82,142      $ 10.72        82,142      $ 13,946,200  
  

 

 

    

 

 

    

 

 

    

Total 2016

     98,172      $ 10.73        98,172     

Total

     2,236,651      $ 11.18        2,236,651      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10.0 million tender offer we announced on March 30, 2017 that expired on May 5, 2017.

 

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MANAGEMENT

Board of Directors

Our Board is divided into three classes. Directors are elected for staggered terms, with the term of office of only one of these three classes of directors expiring at each annual meeting of stockholders. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Our directors have been divided into two groups—interested directors and independent directors. An interested director is an “interested person” as defined in Section 2(a)(19) of the Investment Company Act.

The address for each of our directors is c/o Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, Massachusetts 02453.

 

Name, Address and
Age

 

Position(s) Held
with GECC

 

Term of Office
(Length of Time
Served)

 

Principal
Occupation(s)
During Past 5 Years

 

Number of

Portfolios in Fund
Complex Overseen by
Director (2)

 

Other Directorships
Held by Director
During Past 5 Years

Peter A. Reed (38) (1)   Chairman of the Board of Directors, President and Chief Executive Officer  

Until 2019

(since inception)

 

President and Chief Executive Officer – GECC

 

Chief Investment Officer – GECM

 

Chief Executive Officer – GEC

 

Partner and Portfolio Manager – MAST Capital

  3  

GEC

 

GECM

 

GECC GP Corp.

 

Great Elm FM

Acquisition, Inc.

 

Great Elm FM Holdings, Inc.

 

Avanti

International Wire Group Holdings Inc.

Nebraska Book Holdings, Inc

Randall Revell Horsey (56)   Director   Until 2021
(since 2017)
 

Senior Vice President and Managing Director of North America – MEGA International

Co-founder and President – HelloWallet

  N/A   Acquicore, Inc.
John E. Stuart (52) (3)   Director   Until 2021
(since 2016)
 

Managing Director – A.L. Stuart Financial Services LLC

Managing Member – Full Circle Private Investments, LLC

Co-Chief Executive Officer – Full Circle

  N/A   Full Circle

 

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Name, Address and
Age

 

Position(s) Held
with GECC

 

Term of Office
(Length of Time
Served)

 

Principal
Occupation(s)
During Past 5 Years

 

Number of

Portfolios in Fund
Complex Overseen by
Director (2)

 

Other Directorships
Held by Director
During Past 5 Years

Mark Kuperschmid (56)   Director   Until 2020
(since inception)
  Co-Head of Technology Investment Banking-Bank of America Securities   N/A   None.
Michael C. Speller (49)   Director   Until 2020
(since 2017)
 

Managing Director and Head of Debt Advisory, North America – Rothschild & Co.

 

Managing Director in the Leveraged Finance Origination and Restructuring Group – Credit Suisse

  N/A   None.

 

(1)

Mr. Reed is an interested person as defined under 2(a)(19) of the Investment Company Act due to his position as our Chief Executive Officer and his position as Chief Investment Officer of GECM.

(2)

Mr. Reed is also a director of GECM. GECM is responsible for the day-to-day management of three separately managed amounts for an institutional investor.

(3)

Mr. Stuart is an interested person as defined under 2(a)(19) of the Investment Company Act due to his prior position as chief executive officer and directorship with Full Circle.

Peter A. Reed has been our President and Chief Executive Officer since inception and is the current Chairman of our Board. Mr. Reed is Chief Investment Officer of GECM, Chief Executive Officer of GEC and has served as one of GEC’s directors since May 2015. Mr. Reed is also currently a member of the board of directors of GECM, GECC GP Corp., Great Elm FM Acquisition, Inc., Great Elm FM Holdings, Inc. and Avanti, a UK-based satellite services provider. Previously, Mr. Reed served as a director of International Wire Group Holdings Inc., a wire products manufacturing company, and chairman of the board of Nebraska Book Holdings, Inc, a retailer in the college bookstore industry. Mr. Reed was also a Partner and Portfolio Manager of MAST Capital from 2004 to September 2017. Prior to joining MAST Capital in 2004, Mr. Reed was an investment banking analyst at Brown, Gibbons, Lang & Company where he worked on mergers and acquisitions, in-court and out-of-court financial restructurings, and debt and equity private placements for middle-market companies. Mr. Reed is an “interested person” of GECC as defined in the Investment Company Act due to his position as Chief Investment Officer of GECM, our investment adviser.

John E. Stuart was Full Circle’s chairman through November 2016. Mr. Stuart served as Full Circle’s chief executive officer from Full Circle’s formation until November 2013, and Full Circle’s co-chief executive officer from November 2013 through February 8, 2015. Since February 2017, Mr. Stuart has been a Managing Director of A.L. Stuart Financial Services LLC, the parent company of A.L. Stuart Investments, LLC, a registered investment advisor. In addition, Mr. Stuart is a managing member of Full Circle Private Investments, LLC. Mr. Stuart co-founded Full Circle Funding, LP in 2005 and is a managing partner. Prior to

 

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founding Full Circle Funding, LP, from 2002 to 2004, Mr. Stuart was managing member of Excess Capital LLC which provided financial advisory services and structured and funded equity and debt investments. Prior thereto he was co-founder and president of Titan Outdoor Holdings, a New York-based outdoor advertising company, between 1999 and 2002, and was a director until its sale in 2005. Prior thereto, Mr. Stuart was a managing director in the Corporate Finance Department of Prudential Securities Incorporated between 1996 and 1999. Mr. Stuart began his career at Oppenheimer & Co. Inc. where he was a member of the Mergers and Acquisitions Group and Corporate Finance Department from 1988 to 1996. Mr. Stuart is an “interested person” of GECC as defined in the Investment Company Act due to his prior positions with Full Circle.

Michael C. Speller is a Managing Director and Head of Debt Advisory, North America for Rothschild & Co. Mr. Speller has over 20 years of investment banking and leveraged finance experience which has involved a wide range of debt capital markets products and situations including leveraged loans, high yield bonds, acquisition finance commitments, exchange offers and restructuring. Before joining Rothschild in 2017, Mr. Speller was a Managing Director in the Leveraged Finance Origination and Restructuring Group at Credit Suisse where, from 2008, he led the firm’s leveraged finance origination activities for the Global Industrials Group. From 2005 to 2008, Mr. Speller was involved in a broader range of industry leveraged finance coverage, including the retail, real estate and media and telecom sectors. Prior to 2005, Mr. Speller was a member of the Media & Telecom investment banking groups at Credit Suisse First Boston and Donaldson, Lufkin & Jenrette and previously held positions at the GulfStar Group and NationsBank Corp. Mr. Speller holds a Master of Business Administration degree from Columbia Business School and a Bachelor of Business Administration degree from the University of Texas at Austin.

Randall Revell Horsey has been Senior Vice President & Managing Director of North America for MEGA International, a global software firm helping companies manage enterprise complexity by giving them an interactive view of their operations, since 2017. Mr. Horsey has been a member of the board of directors of Acquicore, Inc., a private real-time energy and management software company since October 2014 and was its interim Chief Financial Officer until 2017. From August 2009 to March 2013, he was a co-founder, president and director of HelloWallet, a software as a service (SaaS) personal financial management company that was subsequently acquired by Morningstar in 2014. Horsey was also an executive at Bank of America, where he ran the Technology Corporate and Investment banking practice and, prior to that, the Equity Capital Markets group. He began his career with The First Boston Corporation and Alex, Brown & Sons.

Mark Kuperschmid is our Lead Independent Director. Mr. Kuperschmid has been a private investor/advisor during the past decade across a variety of industries, and has served in operating roles or provided strategic consulting services with respect to several investments. Mr. Kuperschmid has served as co-founder and partner of Benmark Investments. LLC since 2005. He previously served as Co-Head of Technology Investment Banking for Bank of America Securities from 1995 to 2002 and ran Trammell Crow Company’s Northern California commercial real estate operation from 1988 to 1994. He began his career as a financial analyst with Morgan Stanley in New York.

 

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Executive Officers

The address for each executive officer is c/o Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, Massachusetts 02453.

 

Name, Address and Age

 

Position(s) Held with GECC

 

Term of Office

(Length of Time Served)

 

Principal Occupation(s) During
Past 5 Years

Peter A. Reed (38)   Chairman of the Board of Directors, President and Chief Executive Officer   Since inception  

President and Chief Executive Officer – GECC

 

Chief Investment Officer – GECM

Chief Executive Officer – GEC

 

Partner and Portfolio Manager – MAST Capital

John J. Woods (45) (1)   Chief Financial Officer and Treasurer   Since June 2018  

Chief Financial Officer – GEC

Chief Financial Officer – GECM

 

Chief Financial Officer, Treasurer, and Corporate Controller – Providence Equity Partners LLC

 

Adam M. Kleinman (43)   Chief Compliance Officer and Secretary   Since October 2017  

Chief Operating Officer, Chief Compliance Officer and General Counsel – GECM

 

President and Chief Operating Officer – GEC

 

Partner, Chief Operating Officer and General Counsel – MAST Capital

 

(1)

Mr. Woods was appointed Chief Financial Officer and Treasurer after Michael J. Sell’s resignation in June 2018.

Peter A. Reed See “—Board of Directors” above.

John J. Woods has been our Chief Financial Officer and Treasurer since June 2018. Mr. Woods has also served as the Chief Financial Officer of GEC and GECM since September 2017. Previously, Mr. Woods held various positions at Providence Equity Partners LLC, a multi-strategy global asset management firm, including Corporate Controller and Treasurer and Chief Financial Officer of the capital markets division. Prior to joining Providence Equity Partners LLC, Mr. Woods was a Director of Finance at NewStar Financial, a publicly traded middle-market lender. Mr. Woods received a Master of Business Administration from Suffolk University, a Bachelor of Arts from Saint Anselm College and is a Certified Public Accountant.

Adam M. Kleinman has been our Chief Compliance Officer and Secretary since October 2017. Mr. Kleinman has served as GEC’s President and Chief Operating Officer since March 2018, and as GECM’s Chief Operating Officer, Chief Compliance Officer and General Counsel since September 2017. Mr. Kleinman was a Partner, Chief Operating Officer and General Counsel of MAST Capital from 2009 to

 

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September 2017. Prior to joining MAST Capital, Mr. Kleinman was an associate in the Banking and Leverage Finance group at Bingham McCutchen LLP, where he represented financial institutions, hedge funds and corporate borrowers in a broad range of commercial finance transactions.

Corporate Governance

Code of Ethics

We have adopted a code of ethics which applies to, among others, our senior officers, including our Chief Executive Officer and its Chief Financial Officer. Our code of ethics can be accessed via our website at http://www.greatelmcc.com. We intend to disclose any amendments to or waivers of required provisions of the code by filing reports on Form 8-K.

Director Independence

In accordance with Nasdaq’s rules, our Board will annually determine each director’s independence. We will not consider a director independent unless our Board has determined that he or she has no material relationship with us or GECM. We will monitor the relationships of our directors and officers through a questionnaire each director will complete no less frequently than annually and update periodically as information provided in the most recent questionnaire changes.

In order to evaluate the materiality of any such relationship, our Board will use the definition in Nasdaq Rule 5605(a)(2), which provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the BDC, as defined in Section 2(a)(19) of the Investment Company Act.

Our Board determined that each of the directors is independent and has no relationship with us, except as a director and stockholder, with the exception of Messrs. Reed and Stuart.

Additional Information About Our Board and Its Leadership Structure

Our Board monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to us. Among other things, our Board considers the appointment of our investment manager, administrator and officers, and reviews and monitors the services and activities performed by our investment manager, administrator and officers and approves the engagement, and reviews the performance of, our independent public accounting firm.

Our Board may designate a chairman to preside over the meetings of our Board and meetings of the stockholders and to perform such other duties as may be assigned to her or him by our Board. We do not have a fixed policy as to whether the chairman of our Board should be an independent director. We maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on the criteria that are in the best interests of GECC and our stockholders at such times.

The members of our Board believe that each director’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other directors lead to the conclusion that the directors possess the requisite experience, qualifications, attributes and skills to serve on the Board. Our Board believes that Mr. Reed’s history with MAST Capital, familiarity with our portfolio and GECM’s investment platform, and extensive knowledge of the financial services industry and the investment valuation process in particular qualify him to serve as the chairman of our Board.

Our Board does not have a formal diversity policy as it believes that a candidate’s overall experience and professional background are the most important factors in determining whether such candidate has the right qualifications to serve on our Board. In considering each individual for election as director, our Board took into account a variety of factors, including the candidate’s overall experience and professional background.

 

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The Investment Company Act requires that at least a majority of the members of our Board be independent directors. Currently, three of our five directors are independent directors. The Chairman of our Board is an interested person with respect to GECC. Mark Kuperschmid is currently serving as the Board’s Lead Independent Director. As Lead Independent Director, Mr. Kuperschmid is responsible for coordinating the activities of the other independent directors and for such other duties as are assigned, from time to time, by our Board. Our Board has determined that its leadership structure, in which 80% of the directors are not affiliated with GECM, is appropriate in light of the services that GECM and its affiliates provide to us and the potential conflicts of interest that could arise from these relationships.

Our corporate governance policies include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of audit, compensation, and nominating and corporate governance committees comprised solely of independent directors and the appointment of a Chief Compliance Officer, with whom the independent directors will meet regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures .

Our Board’s Role In Risk Oversight

Our Board performs its risk oversight function primarily through (1) its three standing committees, which report to the entire Board and are comprised solely of independent directors, (2) active monitoring of its Chief Compliance Officer and (3) our compliance policies and procedures.

As described below in more detail under “Committees of the Board of Directors,” the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee assist our Board in fulfilling its risk oversight responsibilities.

Our Board also performs its risk oversight responsibilities with the assistance of the Chief Compliance Officer. Our Board will annually review a written report from our Chief Compliance Officer discussing the adequacy and effectiveness of our and our service providers’ respective compliance policies and procedures. Our Chief Compliance Officer’s annual report will address, at a minimum:

 

   

the operation of our and our service providers’ respective compliance policies and procedures since the last report;

 

   

any material changes to such policies and procedures since the last report;

 

   

any recommendations for material changes to such policies and procedures as a result of the Chief Compliance Officer’s annual review; and

 

   

any compliance matter that has occurred since the date of the last report about which our Board would reasonably need to know to oversee our compliance activities and risks.

In addition, our Chief Compliance Officer meets separately in executive session with the independent directors at least once each year.

Our Board believes its role in risk oversight is effective and appropriate given the extensive regulation to which it is already subject as a BDC. As a BDC, we are required to comply with regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 150% immediately after each time we incur indebtedness, we generally have to invest at least 70% of our gross assets in “qualifying assets” and are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.

 

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Committees of the Board of Directors

GECC currently maintains an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. All directors who were directors during the fiscal year ended December 31, 2017 attended 100% of the aggregate number of meetings of our Board and of the respective committees on which they served. Other than Peter A. Reed, none of the members of our Board attended last year’s annual stockholders’ meeting.

We require each director to make a diligent effort to attend all Board and committee meetings, and encourage directors to attend the annual stockholders’ meeting.

Audit Committee. Our Audit Committee operates pursuant to a charter, available on our website, which sets forth the responsibilities of the Audit Committee. Our Audit Committee’s responsibilities include establishing guidelines and making recommendations to our Board regarding the valuation of our loans and investments, selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements and periodic filings and receiving our audit reports and financial statements. Our Audit Committee is composed of Messrs. Horsey, Kuperschmid, and Speller; all of whom are considered independent under Nasdaq’s rules and are not “interested persons” of GECC as that term is defined in Section 2(a)(19) of the Investment Company Act. Mr. Horsey serves as chairman of our Audit Committee. Our Board has determined that Mr. Horsey is an “audit committee financial expert” as that term is defined under Item 407 of Regulation S-K, as promulgated under the Exchange Act. Each of Messrs. Horsey, Kuperschmid, and Speller meets the current independence and experience requirements of Rule 10A-3 under the Exchange Act. For the fiscal year ended December 31, 2017, the Board held seven Audit Committee meetings.

Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee operates pursuant to a charter, available on our website. The members of our Nominating and Corporate Governance Committee are Messrs. Horsey, Kuperschmid, and Speller; all of whom are considered independent under Nasdaq’s rules and are not “interested persons” of GECC as that term is defined in Section 2(a)(19) of the Investment Company Act. The Nominating and Corporate Governance Committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on our Board or a committee thereof, developing and recommending to our Board a set of corporate governance principles and overseeing the evaluation of our Board and management. Mr. Kuperschmid serves as chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee met three times during the fiscal year ended December 31, 2017.

The Nominating and Corporate Governance Committee will consider stockholder nominations for possible nominees for election as directors when such nominations are submitted in accordance with our bylaws, the Nominating and Corporate Governance Committee charter and any applicable law, rule or regulation regarding director nominations. Nominations should be sent to Corporate Secretary, Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, Massachusetts 02453. To have a candidate considered by our Nominating and Corporate Governance Committee, a stockholder must submit the nomination in writing and must include the following information:

 

   

The name of the stockholder and evidence of the person’s ownership of our stock, including the number of common stock owned and the length of time of the ownership;

 

   

The name of the candidate, the candidate’s resume or a listing of his or her qualifications to be a director and the person’s consent to be named as a director if selected by the Nominating and Corporate Governance Committee and nominated to our Board; and

 

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If requested by the Nominating and Corporate Governance Committee, a completed and signed director’s and officer’s questionnaire in our customary form.

Criteria considered by the Nominating and Corporate Governance Committee in evaluating the qualifications of individuals for election as members of our Board include, to the extent required, compliance with the independence and other applicable requirements of the federal securities laws, the listing standards of Nasdaq, and any other applicable laws, rules, or regulations; the ability to contribute to the effective management of GECC, taking into account the ability to critically review, evaluate, question and discuss information provided to them, and to interact effectively with our management, service providers and counsel, in order to exercise effective business judgment in the performance of their duties; educational background, business, professional training or practice (e.g., medicine, accounting or law), public service or academic positions, experience from service as a board member (including our Board) or as an executive of investment funds, public companies or significant private or not-for-profit entities or other organizations, and/or other life experiences; and personal and professional integrity, character, time availability in light of other commitments, dedication, conflicts of interest and such other relevant factors that the Nominating and Corporate Governance Committee considers appropriate. Our Board also believes it is appropriate for members of our management to serve as a member of our Board. In addition, although our Nominating and Corporate Governance Committee does not have a formal policy with regard to consideration of diversity in identifying director candidates, our Nominating and Corporate Governance Committee may consider whether a potential candidate’s professional experience, education, skills and other individual qualities and attributes, including gender, race or national origin, would provide beneficial diversity of skills, experience or perspective to our Board’s membership and collective attributes. Such considerations will vary based on our Board’s existing membership and other factors, such as the strength of a potential nominee’s overall qualifications relative to diversity considerations.

Compensation Committee. Our Compensation Committee operates pursuant to a charter, available on our website. The charter sets forth the responsibilities of our Compensation Committee. Our Compensation Committee is responsible for annually reviewing and recommending for approval to our Board our Investment Management Agreement with our external manager. In addition, although we do not directly compensate our executive officers currently, to the extent that we did so in the future, the Compensation Committee would also be responsible for reviewing and evaluating their compensation and making recommendations to our Board regarding their compensation. Lastly, the Compensation Committee would produce a report on our executive compensation practices and policies for inclusion in our proxy statement if required by applicable proxy rules and regulations and, if applicable, make recommendations to our Board on our executive compensation practices and policies. The Compensation Committee has the authority to engage compensation consultants and to delegate their duties and responsibilities to a member or to a subcommittee of the Compensation Committee. Our Compensation Committee is comprised of Messrs. Horsey, Kuperschmid, and Speller; all of whom are considered independent under Nasdaq’s rules and are not “interested persons” of GECC as that term is defined in Section 2(a)(19) of the Investment Company Act. Mr. Speller serves as chairman of the Compensation Committee. The Compensation Committee met once during the fiscal year ended December 31, 2017.

 

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Compensation of Directors

The following table sets forth compensation of our directors for the fiscal year ended December 31, 2017.

 

Name

   Fees Earned or
Paid in Cash
     All Other
Compensation (1)
     Total  

Interested Directors

        

Peter A. Reed

     —          —          —    

John E. Stuart

     —          —          —    

Independent Directors

        

Mark C. Biderman (2)

   $ 29,007        —        $ 29,007  

Randall Revell Horsey (3)

   $ 32,164        —        $ 32,164  

Mark Kuperschmid

   $ 58,172        —        $ 58,172  

Eugene I. Davis (4)

   $ 7,863        —        $ 7,863  

Michael C. Speller (5)

   $ 10,329        —        $ 10,329  

 

(1)

In fiscal year 2017, we did not maintain a stock or option plan, non-equity incentive plan or pension plan for our directors.

(2)

Mr. Biderman was not nominated to stand for re-election to the Board at our 2017 annual meeting of stockholders, which was held on November 2, 2017.

(3)

Mr. Horsey became a director on May 30, 2017.

(4)

Mr. Davis resigned from the Board on March 24, 2017.

(5)

Mr. Speller became a director on November 2, 2017.

No compensation is paid by us to directors who are “interested persons.” Our independent directors each receive an annual fee of $45,000. They also receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and each committee meeting. In addition, the chairman of each of our Board’s standing committees receives an annual fee of $10,000 for his or her additional services in these capacities. Each member of these committees receives a $5,000 annual fee for serving on these committees. In addition, we purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors also have the option to have their directors’ fees paid in our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment.

Compensation of Executive Officers

We do not provide direct compensation to our officers. Mr. Reed is indirectly entitled to a portion of any investment advisory fees paid by us to GECM under the Investment Management Agreement through his financial interests in affiliates of GECM. Mr. Woods, who serves as our Chief Financial Officer and Treasurer, and Mr. Kleinman, our Chief Compliance Officer and Secretary, are paid by GECM, subject to reimbursement by us of our allocable portion of such compensation under the Administration Agreement.

Our Portfolio Managers

GECM manages our portfolio. We consider Mr. Reed, who serves as our Chief Executive Officer, John Ehlinger, a portfolio manager at GECM, and Adam Yates, a portfolio manager at GECM, jointly to be our portfolio managers. Messrs. Reed, Ehlinger and Yates comprise a majority of GECM’s investment committee. GECM’s investment team does not receive any direct compensation from us in connection with the management of our portfolio. Mr. Reed, along with members of GECM’s investment team, through their financial interests in affiliates of GECM, are entitled to a portion of amounts received by GECM under the Investment Management Agreement, less expenses incurred by GECM in performing its

 

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services under the Investment Management Agreement. GECM’s investment personnel may be compensated through: (1) annual base salary; (2) cash bonuses; (3) equity in GEC and (4) profit sharing by virtue of ownership of debt or equity securities of affiliates of GECM.

John S. Ehlinger, 49 years old, is a Portfolio Manager of GECC and a Member of GECM’s Investment Committee. Prior to joining GECM, Mr. Ehlinger was the Chief Operating Officer and Chief Financial Officer of a medical device start-up doing business as Wellsense Technologies. Before joining Wellsense, Mr. Ehlinger was a Partner at MAST Capital from 2006 to 2011, focusing on distressed and special situations investments. Prior to joining MAST Capital, Mr. Ehlinger worked as a senior analyst and assistant high yield portfolio manager at DDJ Capital Management, LLC, a distressed and high yield debt-focused hedge fund. Before DDJ, Mr. Ehlinger worked as a senior credit analyst for AIG Global Investment Corporation and as an investment banker at Donaldson, Lufkin & Jenrette in Los Angeles. Mr. Ehlinger started his career in Morgan Stanley’s IT and Equity Research departments. Mr. Ehlinger is currently a member of the Board of Trustees and Treasurer of the Charles River School in Dover, MA. Mr. Ehlinger currently serves on the Board of Managers of PEFS.

Adam W. Yates, 35 years old, is a Portfolio Manager of GECC and a Member of GECM’s Investment Committee. Mr. Yates was a Partner and the Head Trader at MAST Capital until 2017. Mr. Yates managed MAST Capital’s trading responsibilities and, as a member of the Investment Committee, worked closely with the senior investment team in security selection and portfolio construction. Mr. Yates was also a member of MAST Capital’s Risk Committee and Best Execution Committee. Prior to joining MAST Capital in 2007, Mr. Yates was a New Business Coordinator at Appleton Partners, Inc. Mr. Yates currently serves on the board of managers of PEFS and the board of directors of Great Elm FM Holdings, Inc.

Compensation Committee Interlocks and Insider Participation

Currently, none of our executive officers are compensated by us, and as such, our Compensation Committee is not required to produce a report on executive officer compensation for inclusion herein.

During fiscal year 2017, Mr. Reed served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of an entity that had one or more executive officers serve on the Compensation Committee or on our Board. No current or past executive officers or employees of ours or our affiliates serve on our Compensation Committee.

Other Accounts Managed

As of September 27, 2018, GECM is primarily responsible for the day-to-day management of three separately managed accounts for an institutional investor.

 

Name of Investment
Committee Voting
Member

 

Type of Accounts

 

Total No. of
Other Accounts
Managed

 

Total Other
Assets (in
millions)

 

No. of Other
Accounts
where
Advisory Fee
is Based on
Performance

 

Total Assets
in Other
Accounts
where
Advisory Fee
is Based on
Performance
(in  millions)

Peter A. Reed

 

Registered Investment Companies:

Other Pooled Investment Vehicles:

Other Accounts:

 

None

3

None

 

None

$33

None

 

None

3

None

 

None

$33

None

Portfolio Managers’ Material Conflicts of Interest

Certain of our executive officers and directors, and the members of the investment committee of GECM, serve or may serve as officers, directors or principals of entities that operate in the same or related lines

 

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of business as GECC or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. Further, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers that may in the future become affiliated with GEC.

Although funds managed by GECM may have different primary investment objectives than we do, they may from time to time invest in asset classes similar to those targeted by us. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also, from time to time, invest in asset classes similar to those targeted by us. It is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with GECM.

We will pay management and incentive fees to GECM, and will reimburse GECM for certain expenses it incurs. In addition, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.

GECM’s management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.

The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan or note that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.

The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, both we and GECM have the right to terminate the agreement without penalty upon 60 days’ written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation.

Pursuant to the Administration Agreement, we will pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under the Administration Agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.

As a result of the arrangements described above, there may be times when our management team has interests that differ from those of our stockholders, giving rise to a conflict.

Ownership of Securities

As of December 31, 2017, the dollar range of our equity securities beneficially owned by Mr. Reed was $10,001—$50,000, the dollar range of our equity securities beneficially owned by Mr. Ehlinger was $50,001—$100,000 and Mr. Yates owned none, in each case based on the closing price for our common stock of $9.84 on December 29, 2017.

 

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RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

We are a party to the Investment Management Agreement and the Administration Agreement with GECM, which is wholly-owned by GEC. GECM initially hired all of the employees of MAST Capital, certain of whom for a time continued to be employees of MAST Capital. As of the date of this prospectus, GECM and MAST Capital do not share any employees. Affiliates of GECM entered into agreements with MAST Capital and the initial employees of GECM under which MAST Capital and such employees have indirect financial interests in GECM’s net cash flows from the Investment Management Agreement.

Funds managed by MAST Capital own approximately 9% of GEC. Mr. Reed serves as a Chief Executive Officer and a member of the board of directors of GEC, in addition to being our Chief Executive Officer and Chief Investment Officer of GECM. Mr. Kleinman serves as President and Chief Operating Officer of GEC, in addition to being our Chief Compliance Officer and Secretary. GEC owns approximately 18% of our outstanding common stock. Mr. Reed, Mr. Kleinman and certain of GECM’s initial employees were employees of MAST Capital where they managed private investment funds, with investment objectives similar to ours.

Funds managed by MAST Capital own in excess of 10% of the outstanding common stock of Avanti. In addition, certain of our executive officers and directors and the members of GECM’s investment committee serve or may serve as officers, directors or principals of entities that operate in the same or related lines of business as GECC or of investment funds managed by our affiliates. Accordingly, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers that may in the future become affiliated with GEC.

GECM entered into a consulting contract with FS Services LLC that retained Gregg Felton, Full Circle’s former chief executive officer, and John Stuart, Full Circle’s former chairman and a member of our Board.

We and GEC entered into the license agreement described in this prospectus.

As of June 30, 2018, we and certain MAST Funds held debt securities issued by Avanti, Optima and Sonifi Solutions, Inc. The Avanti and Optima securities held by us were contributed to us by the MAST Funds per the Subscription Agreement.

We have established a written policy to govern the review of potential related party transactions. GECM, our Chief Compliance Officer, and any other officers designated by us are required to review the facts and circumstances of transactions with certain affiliates, and to screen any such transactions, for potential compliance issues under Section 57(h) of the Investment Company Act.

 

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CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

The following table lists, as of September 27, 2018 the beneficial ownership of each of our directors, executive officers, each person known to us to beneficially own 5% or more of the outstanding our common stock, and our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own 5% or more of our common stock is based upon Schedule 13G and Schedule 13D filings by such persons with the SEC and other information obtained from such persons, if available. Unless otherwise indicated, we believe that each beneficial owner set forth in the table has sole voting and investment power and has the same address: Great Elm Capital Management, Inc., 800 South Street, Suite 230, Waltham, Massachusetts 02453.

 

Beneficial Owner

   Shares
Beneficially
Owned (1)
     Percent of
Class (2)
 

Interested Directors

     

Peter A. Reed

     4,007        *  

John E. Stuart

     16,545        *  

Independent Directors

     

Michael C. Speller

     5,000        *  

Randall Revell Horsey

     —          *  

Mark Kuperschmid

     1,000        *  

Executive Officers

     

John J. Woods

     2,000        *  

Adam Kleinman

     —          *  

Directors and executive officers as a group

     28,552        *  

5% Beneficial Owners

     

Great Elm Capital Group, Inc.

     1,966,667        18.46

Entities affiliated with MAST Capital Management, LLC (3)

     4,988,153        46.83

 

*

Represents less than 1%.

(1)

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act.

(2)

Based on a total of 10,652,401 shares of our common stock issued and outstanding on September 27, 2018.

(3)

The principal address for MAST Capital is 31 St. James Street, 6th Floor, Boston, Massachusetts 02116. Represents shares of our common stock held by the following for which MAST Capital reports that it has sole power to dispose.

 

   

Mast Credit Opportunities I Master Fund Limited, for which MAST Capital is the investment manager, holds 2,276,279 shares of our common stock. David J. Steinberg reports the common stock held indirectly by MAST Capital because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.

 

   

Mast Select Opportunities Master Fund, L.P., for which MAST Capital is the investment manager, holds 2,543,418 shares of our common stock. David J. Steinberg reports the common stock held indirectly by MAST Capital because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.

 

   

Mast Admiral Master Fund, L.P., for which MAST Capital is the investment manager, holds 154,497 shares of our common stock. David J. Steinberg reports the common stock held indirectly by MAST Capital because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.

 

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Mast Select Opportunities, L.P., for which MAST Capital is the investment manager, holds 13,959 shares of our common stock. David J. Steinberg reports the common stock held indirectly by MAST Capital because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.

 

   

David J. Steinberg, by virtue of his control of the disposition and voting of securities held by entities affiliated with MAST Capital, may be in a position to control the outcome of voting on matters as to which our common stockholders are entitled to vote.

Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of December 31, 2017. We are not part of a “family of investment companies,” as that term is defined in the Investment Company Act.

 

Name

   Dollar Range of
Equity  Securities
Beneficially
Owned (1)  (2)

Interested Directors

  

Peter A. Reed

   $10,001 - $50,000

John E. Stuart

   Over $100,000

Independent Directors

  

Michael C. Speller

   $10,001 - $50,000

Randall Revell Horsey

   None

Mark Kuperschmid

   $1 - $10,000

 

(1)

Dollar ranges are as follows: None, $1—$10,000, $10,001—$50,000, $50,001—$100,000, or Over $100,000.

(2)

The dollar range of equity securities beneficially owned is based on the closing price for our common stock of $9.84 on December 29, 2017 on Nasdaq. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) under the Exchange Act.

 

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DETERMINATION OF NET ASSET VALUE

We determine the net asset value of GECC each quarter by subtracting our total liabilities from the fair value of our gross assets.

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, short term debt investments with remaining maturities within 90 days are generally valued at amortized cost, which approximates fair value.

Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with our valuation policy that has been reviewed and approved by our Board, who also approves in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

Determinations in Connection with Offerings

Absent the approval by a majority of our common stockholders to allow us to issue common stock at a price below net asset value, our Board or an authorized committee thereof will be required to make the determination that we are not selling our common stock at a price below the then current net asset value of our common stock at the time of any offering of our common stock. Our Board or an authorized committee thereof consider the following factors, among others, in making such determination:

 

   

the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC;

 

   

our management’s assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) during the period beginning on the date of the most recently disclosed net asset value of our common stock and ending two days prior to the date of the sale of our common stock; and

 

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the magnitude of the difference between (1) a value that our Board or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (2) the offering price of the our common stock in the proposed offering.

These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records that we are required to maintain under the Investment Company Act.

 

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DIVIDEND REINVESTMENT PLAN

We have adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, if our Board authorizes, and we declare, a cash distribution, our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions (net of any applicable withholding tax) automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.

No action will be required on the part of a registered stockholder to have his or her cash distribution reinvested in our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer & Trust Company, LLC, the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up an account for common stock acquired through the plan for each stockholder who has not elected to receive distributions in cash and hold such common stock in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not less than 10 days prior to each applicable record date, the plan administrator will, instead of crediting shares to the participant’s account, issue a certificate registered in the participant’s name for the number of whole shares of our common stock and a check for any fractional share.

Those stockholders whose common stock are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.

We intend to use primarily newly issued common stock to implement the plan to the extent our common stock is trading at a premium to net asset value per share of the common stock. In the case that such newly issued common stock is used to implement the plan, the number of common stock to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by 95% of the market price per share of our common stock at the close of trading on the date fixed by the Board for such purposes. Market price per share on that date will be the closing price for such common stock on the national securities exchange on which our common stock is then listed or, if no sale is reported for such day, at the average of their electronically reported bid and asked prices. Notwithstanding the foregoing, we reserve the right to instruct the plan administrator to purchase our common stock in the open market in connection with our implementation of the plan. Shares purchased in open market transactions by the plan administrator will be allocated to each stockholder who has not so elected to receive cash distributions in cash in the manner set forth above for issuance of new common stock, substituting where applicable the average purchase price, excluding any brokerage charges or other charges, of all common stock purchased in the open market in lieu of the market price per share. The number of shares of our common stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional common stock will be issued has been determined and elections of our stockholders have been tabulated.

The plan administrator’s fees under the plan will be paid by us. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the common stock held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of $15 plus a per share brokerage commission from the proceeds.

Stockholders who receive distributions in the form of stock are subject to the same federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. A stockholder’s basis for determining gain or loss upon the sale of stock received in a distribution from us will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock

 

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received in a distribution will have a new holding period for tax purposes commencing on the day following the day on which the common stock is credited to the U.S. stockholder’s account.

We may terminate the plan upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any distribution by us. All correspondence concerning the plan should be directed to the plan administrator by mail at 6201 15th Avenue, Brooklyn, New York 11219 or by phone at (800) 937-5449.

 

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of certain material U.S. federal income tax consequences to U.S. Holders and Non-U.S. Holders (as defined below) of the acquisition, ownership, and disposition of the Notes that we are offering. The following discussion is not exhaustive of all possible tax consequences. This summary is based upon the Code, U.S. Treasury Department (the “U.S. Treasury”) regulations (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the IRS, and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to those discussed below.

This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances (such as the effects of Section 451(b) of the Code) or to holders subject to special tax rules, such as partnerships, subchapter S corporations or other pass-through entities (and holders of interests in such entities), any government (or instrumentality or agency thereof), banks, financial institutions, tax-exempt entities, insurance companies, regulated investment companies, real estate investment trusts, controlled foreign corporations, passive foreign investment companies and stockholders of such corporations, trusts and estates, dealers in securities or currencies, traders in securities that have elected to use the mark-to-market method of accounting for their securities, persons holding the Notes as part of an integrated investment, including a “straddle,” “hedge,” “constructive sale,” or “conversion transaction,” persons (other than Non-U.S. Holders (as defined below)) whose functional currency for tax purposes is not the U.S. dollar, and persons subject to the alternative minimum tax provisions of the Code. This summary does not include any discussion of the tax laws of any state, local or foreign government that may be applicable to a particular holder nor does it discuss any U.S. federal tax consequences other than U.S. federal income tax consequences (such as U.S. federal estate or gift tax consequences).

This summary is directed solely to U.S. Holders and Non-U.S. Holders (as defined below) that will purchase the Notes offered in this prospectus at their “issue price” (i.e., the first price at which a substantial amount of the Notes is sold for money to investors, other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers) and will hold such Notes as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment.

You should consult your own tax advisor concerning the U.S. federal income tax consequences to you of acquiring, owning and disposing of the Notes, as well as any tax consequences arising under the laws of any state, local, foreign, or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

As used in this prospectus, the term “U.S. Holder” means a beneficial owner of a Note offered in this prospectus that is for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state therein or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.

 

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Notwithstanding the preceding paragraph, to the extent provided in U.S. Treasury regulations, some trusts in existence on August 20, 1996, and treated as U.S. persons prior to that date, that elect to continue to be treated as a domestic trust also will be U.S. Holders.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds the Notes offered in this prospectus, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership, and accordingly, this summary does not apply to partnerships. A partner of a partnership holding the Notes should consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition by the partnership of the Notes.

U.S. Holders

Payment of Interest . Interest on a Note generally will be included in the income of a U.S. Holder as interest income at the time it is accrued or is received in accordance with the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes and will be ordinary income.

Sale, Exchange, or Retirement of the Notes . Upon the sale, exchange, retirement, or other taxable disposition of a Note, a U.S. Holder will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, retirement, or other taxable disposition (other than amounts attributable to accrued but unpaid interest, which will be taxed as such) and the U.S. Holder’s adjusted tax basis in the Note. A U.S. Holder’s adjusted tax basis in a Note generally will be the cost of the Note to such U.S. Holder. Gain or loss realized on the sale, exchange, retirement, or other taxable disposition of a Note generally will be capital gain or loss and will be long-term capital gain or loss if the Note has been held for more than one year. The deductibility of capital losses is subject to limitations under the Code.

Additional Medicare Tax on Unearned Income . A tax of 3.8% is imposed on certain “net investment income” (or “undistributed net investment income”, in the case of estates and trusts) received by taxpayers with adjusted gross income above certain threshold amounts. “Net investment income” as defined for U.S. federal Medicare contribution purposes generally includes interest payments on, and gain recognized from the sale or other disposition of, the Notes. U.S. Holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the Notes.

Non-U.S. Holders

This discussion applies to you if you are a “Non-U.S. Holder.” A “Non-U.S. Holder” is a beneficial owner of a Note that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).

Payments of Interest . Subject to the discussions below concerning backup withholding and FATCA, interest payments that a Non-U.S. Holder receives from us or our agent and that are not effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States, or a permanent establishment maintained in the United States if certain tax treaties apply, generally will not be subject to U.S. federal income or withholding tax unless:

 

   

the Non-U.S. Holder actually or constructively owns 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of 871(h)(3) of the Code;

 

   

the Non-U.S. Holder is a “controlled foreign corporation” for U.S. federal income tax purposes that is related to us (directly or indirectly) through stock ownership;

 

   

the Non-U.S. Holder is a bank extending credit under a loan agreement in the ordinary course of its trade or business; or

 

   

the Non-U.S. Holder does not satisfy the certification requirements described below.

 

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A Non-U.S. Holder generally will satisfy the certification requirements if it certifies, under penalties of perjury, that it is not a U.S. person (on a properly executed IRS Form W-8BEN or W-8BEN-E or other applicable form), or holds its Notes through certain foreign intermediaries and satisfies the certification requirements of applicable U.S. Treasury regulations.

Interest payments not meeting the requirements set forth above may be subject to withholding tax at the rate of 30% (or lower applicable treaty rate). Interest effectively connected with a Non-U.S. Holder’s conduct of a U.S. trade or business, however, would not be subject to withholding tax as long as the Non-U.S. Holder provides us or our paying agent with an adequate certification (currently on IRS Form W-8ECI). To claim benefits under an income tax treaty, a Non-U.S. Holder must obtain a taxpayer identification number and provide a properly executed IRS Form W-8BEN or W-8BEN-E (or other applicable form) to us or our paying agent before the payment of interest. In addition, special rules may apply to claims for treaty benefits made by Non-U.S. Holders that are entities rather than individuals. A Non-U.S. Holder that is eligible for a reduced rate of U.S. federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Sale, Exchange, or Retirement of the Notes . A Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale, exchange, retirement, or other taxable disposition of the Notes (except with respect to accrued and unpaid interest, which would be taxed as described under “—Payment of Interest” above), provided that:

 

   

the gain is not effectively connected with the conduct of a trade or business within the United States, or a permanent establishment maintained in the United States if certain tax treaties apply;

 

   

in the case of a Non-U.S. Holder that is an individual, the Non-U.S. Holder is not present in the United States for 183 days or more in the taxable year of the sale, exchange, or other disposition of the Notes; and

 

   

the Non-U.S. Holder is not subject to tax pursuant to certain provisions of U.S. federal income tax law applicable to certain expatriates.

An individual Non-U.S. Holder who is present in the United States for 183 days or more in the taxable year of sale, exchange, or other disposition of a Note, and if certain other conditions are met, will be subject to U.S. federal income tax at a rate of 30% on the gain realized on the sale, exchange, or other taxable disposition of such Note, which may be offset by U.S. source capital losses.

Income Effectively Connected with a Trade or Business within the United States . If a Non-U.S. Holder of a Note is engaged in the conduct of a trade or business within the United States and if interest on a Note, or gain realized on the sale, exchange, or other taxable disposition of the Note, is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States), the Non-U.S. Holder generally will be subject to U.S. federal income tax on such interest or gain on a net income basis in the same manner as if it were a U.S. Holder. In addition, if any such Non-U.S. Holder is a foreign corporation, it may also be subject to a branch profits tax equal to 30% (or lower applicable treaty rate) of its earnings and profits for the taxable year that are effectively connected with its conduct of a trade or business in the United States, subject to certain adjustments.

Backup Withholding and Information Reporting

Payments of interest on, or the proceeds of the sale or other disposition of, a Note held by a U.S. Holder are generally subject to information reporting unless the U.S. Holder is an exempt recipient (such as a

 

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corporation). Such payments, along with principal payments on the Note, may also be subject to U.S. federal backup withholding at the applicable rate if the recipient of such payment fails to supply a taxpayer identification number, certified under penalties of perjury, as well as certain other information or otherwise fails to establish an exemption from backup withholding.

A Non-U.S. Holder may be required to comply with certain certification procedures to establish that the holder is not a U.S. person in order to avoid backup withholding with respect to our payment of principal and interest on, or the proceeds of the sale or other disposition of, a Note. In certain circumstances, the name and address of the beneficial owner and the amount of interest paid on a Note, as well as the amount, if any, of tax withheld, may be reported to the IRS. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides.

Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a holder’s U.S. federal income tax liability provided the required information is furnished to the IRS.

Foreign Account Tax Compliance Act

Sections 1471 through 1474 of the Code and related U.S. Treasury guidance (collectively referred to as “FATCA”) impose U.S. federal withholding tax at a rate of 30% on payments to certain foreign entities of (i) U.S.-source interest (including interest paid on the Notes) and (ii) the gross proceeds from the sale or other disposition after December 31, 2018 of an obligation that produces U.S.-source interest (including a disposition of the Notes). This withholding tax applies to a foreign entity, whether acting as a beneficial owner or an intermediary, unless such foreign entity complies with (i) certain information reporting requirements regarding its U.S. account holders and its U.S. owners and (ii) certain withholding obligations regarding certain payments to its account holders and certain other persons. Accordingly, the entity through which a U.S. Holder or a Non-U.S. Holder holds the Notes will affect the determination of whether such withholding is required. We will not pay any additional amounts to U.S. Holders or Non-U.S. Holders in respect of any amounts withheld under FATCA. U.S. Holders that own their interests in a Note through a foreign entity or intermediary, and Non-U.S. Holders, should consult their tax advisors regarding the applicability of FATCA.

The U.S. federal income tax discussion set forth above is included for general information only and may not be applicable depending upon a holder’s particular situation. You should consult your own tax advisors with respect to the tax consequences to you of the acquisition, ownership and disposition of the Notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in U.S. federal or other tax laws.

 

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DESCRIPTION OF OUR COMMON STOCK

The following description is based on relevant portions of the Maryland General Corporation Law and our charter and bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a more detailed description of the provisions summarized below.

Our authorized stock consists of 100,000,000 shares of stock, par value $0.01 per share, all of which are initially designated as common stock. Our common stock is listed on Nasdaq under the ticker symbol “GECC.” There are no outstanding options or warrants to purchase our common stock. No common stock has been authorized for issuance under any equity compensation plans. Our fiscal year-end is December 31. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

The following are our outstanding classes of securities as of September 27, 2018:

 

Title of Class

   Amount Authorized      Amount Held by
GECC or for
GECC’s Account
     Amount Outstanding
Exclusive of Amounts
Shown in the  Adjacent
Column
 

Common Stock

     100,000,000        —          10,652,401  

2022 Notes

     —          —        $ 32.6 million  

2025 Notes

     —          —        $ 46.4 million  

Under our charter, our Board is authorized to classify and reclassify any unissued stock into other classes or series of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that a majority of our entire Board, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

Common Stock

All of our common stock has equal rights as to earnings, assets, voting, and dividends and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive, conversion, redemption or appraisal rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such common stock will be unable to elect any director.

Preferred Stock

Our charter authorizes our Board to classify and reclassify any unissued common stock into other classes or series of stock, including preferred stock. The cost of any such reclassification would be borne by our existing common stockholders. Under the terms of our charter, our Board is authorized to issue

 

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preferred stock in one or more classes or series without stockholder approval. Prior to issuance of common stock of each class or series, the Board is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board could authorize the issuance of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. You should note, however, that any issuance of preferred stock must comply with the requirements of the Investment Company Act. The Investment Company Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of our common stock is made, the aggregate involuntary liquidation preference of such preferred stock together with the aggregate involuntary liquidation preference or aggregate value of all other senior securities must not exceed an amount equal to 50% of our gross assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two full years or more. Certain matters under the Investment Company Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote as a separate class from the holders of common stock on a proposal to cease operations as a BDC. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions. However, we do not currently have any plans to issue preferred stock. Our Board has the authority to amend, alter, or repeal the bylaws of the corporation.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment and that is material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the Investment Company Act.

Our charter authorizes us, and our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the Investment Company Act, to indemnify any present or former director or officer of GECC or any individual who, while a director or officer of GECC and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise as a director, officer, partner, member, manager or trustee, who is made, or threatened to be made, a party to, or witness in, a proceeding by reason of his or her service in such capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as such and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the Investment Company Act, we will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

Maryland law requires a corporation (unless its charter requires otherwise, which ours does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her

 

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service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to or in which they may be made, or threatened to be made, a party or witness by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Under Maryland law, a Maryland corporation may not indemnify a director or officer in a suit by the corporation or in its right in which the director or officer was adjudged liable to the corporation or in a suit in which the director or officer was adjudged liable on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by the corporation or in its right, or for a judgment of liability on the basis that a personal benefit was improperly received, is limited to expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

Our insurance policy does not currently provide coverage for claims, liabilities and expenses that may arise out of activities that our present or former directors or officers have performed for another entity at our request. There is no assurance that such entities will in fact carry such insurance. However, in the event that our present or former directors or officers serve another entity as a director, officer, partner or trustee, we expect to obtain insurance providing coverage for such persons for any claims, liabilities or expenses that may arise out of their activities while serving in such capacities.

Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws

The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

Classified Board of Directors

Our Board is divided into three classes of directors serving staggered three-year terms. Upon expiration of their terms, directors of each class will be elected to serve for a term ending at the third annual meeting of stockholders following his or her election and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified Board will help to ensure the continuity and stability of our management and policies.

 

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Election of Directors

Our charter and bylaws provide that the affirmative vote of the holders of a plurality of the outstanding common stock entitled to vote in the election of directors cast at a meeting of stockholders duly called and at which a quorum is present will be required to elect a director. Our Board has the exclusive right to amend the bylaws to alter the vote required to elect directors.

Number of Directors; Vacancies; Removal

Our charter provides that the number of directors will be set only by the Board in accordance with our bylaws. Our bylaws provide that a majority of our entire Board may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than nine. We have elected to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the Board. Accordingly, except as may be provided by our Board in setting the terms of any class or series of preferred stock, any and all vacancies on our Board may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act.

Our charter provides that, subject to the rights of holders of preferred stock, a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

Action by Stockholders

Under the Maryland General Corporation Law, unless a corporation’s charter provides otherwise (which our charter does not), stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to our Board and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by our Board or (3) by a stockholder who was a stockholder of record at the record date set by our Board for the purpose of determining stockholders entitled to vote at the meeting, at the time of giving notice as provided for in our bylaws and at the time of the meeting (and any postponement or adjournment thereof), who is entitled to vote at the meeting in the election of each individual so nominated or on such other business and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board at a special meeting may be made only (1) by our Board or (2) provided that the Board has determined that directors will be elected at the meeting, by a stockholder who was a stockholder of record at the record date set by our Board for the purpose of determining stockholders entitled to vote at the meeting, at the time of giving notice as provided for in our bylaws and at the time of the meeting (and any postponement or adjournment thereof), who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice provisions of the bylaws. The purpose of requiring stockholders to give us

 

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advance notice of nominations and other business is to afford our Board a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed. They may also have had the effect of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

Our bylaws provide that special meetings of stockholders may be called by our Board and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, convert to another form of entity, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter.

However, our charter provides that approval of the following matters requires the affirmative vote of stockholders entitled to cast at least 80% of the votes entitled to be cast on the matter:

 

   

amendments to the provisions of our charter relating to the classification of our Board, the power of our Board to fix the number of directors and to fill vacancies on our Board, the vote required to elect or remove a director, the vote required to approve our dissolution, amendments to our charter and extraordinary transactions and our Board exclusive power to amend our bylaws;

 

   

charter amendments that would convert us from a closed-end company to an open-end company or make our common stock a redeemable security (within the meaning of the Investment Company Act);

 

   

our liquidation or dissolution or any amendment to our charter to effect any such liquidation or dissolution;

 

   

any merger, consolidation, conversion, share exchange or sale or exchange of all or substantially all of our assets that the Maryland General Corporation Law requires be approved by our stockholders; or

 

   

any transaction between us, on the one hand, and any person or group of persons acting together that is entitled to exercise or direct the exercise, or acquire the right to exercise or direct the exercise, directly or indirectly (other than solely by virtue of a revocable proxy), of

 

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one-tenth or more of the voting power in the election of our directors generally, or any person controlling, controlled by or under common control with, employed by or acting as an agent of, any such person or member of such group, or collectively, “Transacting Persons,” on the other hand.

However, if such amendment, proposal or transaction is approved by a majority of our continuing directors (in addition to approval by our Board), such amendment, proposal or transaction may be approved by a majority of the votes entitled to be cast on such a matter, except that any transaction including Transacting Persons that would not otherwise require stockholder approval under the Maryland General Corporation Law would not require further stockholder approval unless another provision of our charter requires such approval. In either event, in accordance with the requirements of the Investment Company Act, any such amendment, proposal or transaction that would have the effect of changing the nature of our business so as to cause us to cease to be, or to withdraw our election as, a BDC would be required to be approved by a majority of our outstanding voting securities, as defined under the Investment Company Act. The “continuing directors” are defined in our charter as (1) certain of our current directors named therein, (2) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the Board or (3) any successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor continuing directors then in office.

Our charter and bylaws provide that our Board will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.

No Appraisal Rights

Except with respect to appraisal rights arising in connection with the Maryland Control Acquisition Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of our entire Board determines that such rights shall apply.

Control Share Acquisitions

The Maryland Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

 

   

one-tenth or more but less than one-third;

 

   

one-third or more but less than a majority; or

 

   

a majority or more of all voting power.

The requisite stockholder approval must be obtained each time an acquirer crosses one of the thresholds of voting power set forth above. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions.

 

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A person who has made or proposes to make a control share acquisition may compel the Board of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations, including, as provided in our bylaws, compliance with the Investment Company Act. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or, if a meeting of stockholders at which the voting rights of the shares are considered and not approved is held, as of the date of such meeting. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.

The Maryland Control Share Acquisition Act does not apply (a) to stock acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Maryland Control Share Acquisition Act only if our Board determines that it would be in our best interests and if the SEC staff does not object to our determination that GECC’s being subject to the Maryland Control Share Acquisition Act does not conflict with the Investment Company Act.

Business Combinations

Under Maryland law, the Maryland Business Combination Act provides that certain “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

   

any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding voting stock; or

 

   

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under this statute if the Board approved in advance the transaction by which the stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the Board may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the Board.

 

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After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the Board of the corporation and approved by the affirmative vote of at least:

 

   

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

   

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than common stock held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their stock in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its stock.

The Maryland Business Combination Act permits various exemptions from its provisions, including business combinations that are exempted by the Board before the time that the interested stockholder becomes an interested stockholder. Our Board has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by the Board, including a majority of the directors who are not interested persons as defined in the Investment Company Act. This resolution may be altered or repealed in whole or in part at any time; however, our Board will adopt resolutions so as to make us subject to the provisions of the Maryland Business Combination Act only if our Board determines that it would be in our best interests and if the SEC staff does not object to our determination that GECC being subject to the Business Combination Act does not conflict with the Investment Company Act. If this resolution is repealed, or the Board does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of GECC and increase the difficulty of consummating any offer.

Forum Selection Clause

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders, (c) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the Maryland General Corporation Law or our charter or bylaws or (d) any action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs doctrine shall be, in each case, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division.

Waiver of Corporate Opportunity Doctrine

Our charter provides that, we, by resolution of our Board, may renounce any interest or expectancy of ours in (or in being offered an opportunity to participate in) business opportunities that are presented to us or developed by or presented to one of more of our directors or officers.

Conflict with Investment Company Act

Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Acquisition Act (if we amend our bylaws to be subject to such Act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the Investment Company Act, the applicable provision of the Investment Company Act will control.

 

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Privacy Principles

We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).

We restrict access to nonpublic personal information about our stockholders to employees of GECM and its affiliates with a legitimate business need for the information. We intend to maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.

 

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UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement dated                     , 2018 between us and Ladenburg Thalmann & Co. Inc., acting as the representative of the underwriters of this offering, we have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase from us, the aggregate principal amount of Notes indicated in the table below:

 

Underwriters    Principal Amount
of Notes
 

Ladenburg Thalmann & Co. Inc.

  

Janney Montgomery Scott LLC

  
  

 

 

 

Total

   $                
  

 

 

 

Ladenburg Thalmann & Co. Inc. and Janney Montgomery Scott LLC are acting as book-running managers of this offering.

The underwriting agreement provides that the obligations of the several underwriters are subject to certain conditions precedent such as the receipt by the underwriters of officers’ certificates and legal opinions and approval of certain legal matters by their counsel. The underwriting agreement provides that the underwriters will purchase all of the Notes if any of these Notes are purchased. If an underwriter defaults, the underwriting agreement provides that, under the circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters have advised us that they currently intend to make a market in the Notes. However, the underwriters are not obligated to do so and may discontinue any market-making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes.

The underwriters are offering the Notes, subject to their acceptance of the Notes from us and subject to prior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Expenses

The underwriters have advised us that they propose to offer the Notes to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at a price less a concession not in excess of $        per Note. The underwriters may allow, and the dealers may reallow, a discount from the concession not in excess of $        per Note to certain broker dealers. After the public offering price, concessions and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.

 

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The following table shows the public offering price, the underwriting discounts and commissions that we are to pay to the underwriters and the proceeds, before expenses, to us in connection with this offering (expressed as a percentage of the principal amount of the Notes). The information assumes either no exercise or full exercise of the underwriters’ over-allotment option.

 

     Per Note      Without Over-
allotment Option
     With Over-
allotment Option
 

Public offering price

   $                    $                    $                

Underwriting discounts and commissions (     % of public offering price)

   $        $        $    

Proceeds (before expenses)

   $        $        $    

We estimate expenses payable by us in connection with this offering (including reimbursement of the underwriters’ counsel fees of approximately $        in connection with the review of this offering by the Financial Industry Regulatory Authority, Inc.), other than the underwriting discounts and commissions referred to above, will be approximately $500,000.

Determination of Offering Price

Prior to the offering, there has not been a public market for the Notes. Consequently, the public offering price for the Notes will be determined by negotiations between us and the underwriters. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

We and the underwriters offer no assurances that the public offering price will correspond to the price at which the Notes will trade in the public market subsequent to the offering or that an active trading market for the Notes will develop and continue after the offering.

Listing

We intend to list the Notes on Nasdaq. We expect trading in the Notes on Nasdaq to begin within 30 days after the original issue date under the trading symbol “                .”

Over-allotment Option

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional $        aggregate principal amount of the Notes at the public offering price set forth on the cover of this prospectus less underwriting discounts and commissions solely to cover over-allotments, if any. If the underwriters exercise this option, each will be obligated, subject to the specified conditions, to purchase an additional aggregate principal amount of Notes proportionate to that underwriter’s initial principal amount reflected in the table above.

No Sales of Similar Securities

Subject to certain exceptions, we have agreed not to directly or indirectly, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise transfer or dispose of any debt securities issued by the Company or any securities convertible into or exercisable or exchangeable for debt securities issued by the Company for a period of 90 days after the date of this prospectus without first obtaining the written consent of Ladenburg Thalmann & Co. Inc. This consent may be given at any time without public notice.

 

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Stabilization

The underwriters have advised us that, pursuant to Regulation M under the Exchange Act, certain persons participating in the offering may engage in transactions including over-allotment, covering transactions and stabilizing transactions, which may have the effect of stabilizing or maintaining the market price of the Notes at a level above that which might otherwise prevail in the open market. Over-allotment involves syndicate sales of securities in excess of the aggregate principal amount of securities to be purchased by the underwriters in the offering, which creates a short position for the underwriters. Covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover short positions.

A stabilizing bid is a bid for the purchase of Notes on behalf of the underwriters for the purpose of fixing or maintaining the price of the Notes. A syndicate covering transaction is the bid for or the purchase of Notes on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our Notes or preventing or retarding a decline in the market price of our Notes. As a result, the price of our Notes may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriters to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the Notes originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member.

Neither we, nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes. The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.

Electronic Distribution

A prospectus in electronic format may be made available by e-mail or on the web sites or through online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a limited principal amount of the Notes for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, information on the underwriters’ web sites and any information contained in any other web site maintained by any of the underwriters or selling group members is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters and should not be relied on by investors.

Other Relationships

Certain of the underwriters and their affiliates have provided in the past and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking and other services to us, our portfolio companies or our affiliates for which they have received or will be entitled to receive separate fees. In particular, the underwriters or their affiliates may execute transactions with us, on behalf of us, any of our portfolio companies or our affiliates. In addition, the underwriters or their affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to or whose loans are syndicated to us, our portfolio companies or our affiliates.

 

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The underwriters or their affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to us, any of our portfolio companies or our affiliates.

After the date of this prospectus, the underwriters and their affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the ordinary course of their business and not in connection with the offering of the Notes. In addition, after the offering period for the sale of the Notes, the underwriters or their affiliates may develop analyses or opinions related to us or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding us to our noteholders or any other persons.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. Certain of the underwriters and their affiliates that may have a lending relationship with us may routinely hedge their credit exposure to us consistent with their customary risk management policies. Typically, such underwriters and their affiliates would hedge such exposure by entering into transactions that consist of either the purchase of credit default swaps or the creation of short positions in our securities, including potentially the Notes offered hereby. Any such short positions could adversely affect future trading prices of the Notes offered hereby. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The principal business address of the underwriters are: Ladenburg Thalmann & Co. Inc., 277 Park Avenue, 26th floor, New York, NY 10172; Janney Montgomery Scott LLC, 1717 Arch Street, Philadelphia, PA 19103.

Michael C. Speller, one of our directors, is a Managing Director and Head of Debt Advisory, North America for Rothschild & Co., which is a member of the Financial Industry Regulatory Authority.

Alternative Settlement Cycle

We expect that delivery of the Notes will be made against payment therefor on or about                 , 2018, which will be the                 business day following the trade date for the issuance of the Notes (such settlement being herein referred to as “                ”). Under Rule 15c6-1 promulgated under the Exchange Act, trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Notes on the date hereof or the next two succeeding business days will be required, by virtue of the fact that the Notes initially will settle in             business days, to specify an alternative settlement arrangement at the time of any such trade to prevent a failed settlement.

 

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Other Jurisdictions

The Notes offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such Notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Notes offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

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CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR

Our securities and cash are held in safekeeping by State Street Bank and Trust Company located at 100 Huntington Avenue, Boston, Massachusetts 02116. American Stock Transfer & Trust Company, LLC acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 6201 15th Avenue, Brooklyn, New York 11219.

LEGAL MATTERS

Certain legal matters with respect to the Notes offered hereby will be passed upon for us by Jones Day, New York, New York, and Venable LLP, Baltimore, Maryland. Certain legal matters in connection with this offering will be passed upon for the underwriters by Dechert LLP, Boston, Massachusetts, who may rely as to certain matters of Maryland law upon the opinion of Venable LLP.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Our consolidated statement of assets and liabilities as of December 31, 2017 and December 31, 2016, and our related statement of operations, changes in net assets, cash flows and financial highlights for the year ended December 31, 2017 and for the period from April 22, 2016 (inception) to December 31, 2016, have been audited by Deloitte & Touche LLP, McLean, Virginia, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the registration statement. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The principal business address of Deloitte & Touche LLP is 7900 Tysons One Pl #800, McLean, VA 22102.

The consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Full Circle and subsidiaries as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net assets and cash flows for each of the two years in the period ended June 30, 2016 have been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the registration statement.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act. The registration statement contains additional information about us and the Notes being offered by this prospectus.

We are required to file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing to the SEC’s Public Reference Section, Washington, D.C. 20549. This information will also be available free of charge by contacting us by mail at 800 South Street, Suite 230, Waltham, Massachusetts 02453, by telephone at (617) 375-3006 or on our website at http://www.greatelmcc.com.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

GREAT ELM CAPITAL CORP.

  

Consolidated Statements of Assets and Liabilities as of June  30, 2018 and December 31, 2017 (unaudited)

     F-2  

Consolidated Statements of Operations for the three and six months ended June  30, 2018 and 2017 (unaudited)

     F-3  

Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2018 and 2017 (unaudited)

     F-4  

Consolidated Statements of Cash Flows for the six months ended June  30, 2018 and 2017 (unaudited)

     F-5  

Consolidated Schedule of Investments as of June 30, 2018 and December  31, 2017 (unaudited)

     F-6  

Notes to the Consolidated Financial Statements (unaudited)

     F-15  

Report of Independent Registered Public Accounting  Firm

     F-35  

Consolidated Statements of Assets and Liabilities as of December  31, 2017 and December 31, 2016

     F-36  

Consolidated Statements of Operations for the year ended December  31, 2017 and the period from inception (April 22, 2016) through December 31, 2016

     F-37  

Consolidated Statements of Changes in Net Assets for the year ended December  31, 2017 and the period from inception (April 22, 2016) through December 31, 2016

     F-38  

Consolidated Statements of Cash Flows for the year ended December  31, 2017 and the period from inception (April 22, 2016) through December 31, 2016

     F-39  

Consolidated Schedules of Investments as of December  31, 2017 and December 31, 2016

     F-40  

Notes to Consolidated Financial Statements

     F-47  

 

     Page  

FULL CIRCLE CAPITAL CORPORATION

  

Report of Independent Registered Public Accounting Firm

     F-70  

Consolidated Statements of Assets and Liabilities as of June  30, 2016 and June 30, 2015

     F-72  

Consolidated Statements of Operations for the years ended June  30, 2016 and June 30, 2015

     F-73  

Consolidated Statements of Changes in Net Assets for the years ended June  30, 2016 and June 30, 2015

     F-74  

Consolidated Statements of Cash Flows for the years ended June  30, 2016 and June 30, 2015

     F-75  

Consolidated Schedules of Investments as of June 30, 2016 and June  30, 2015

     F-77  

Notes to Consolidated Financial Statements

     F-89  

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)

Dollar amounts in thousands (except per share amounts)

 

     June 30, 2018
(unaudited)
    December 31,
2017
 

Assets

    

Investments

    

Non-affiliated, non-controlled investments, at fair value (amortized cost of $139,972 and $179,558, respectively)

   $ 136,910     $ 144,996  

Non-affiliated, non-controlled short term investments, at fair value (amortized cost of $79,198 and $65,892, respectively)

     79,190       65,890  

Affiliated investments, at fair value (amortized cost of $87,700 and $4,240, respectively)

     41,984       1,770  

Controlled investments, at fair value (amortized cost of $21,502 and $18,487, respectively)

     20,409       18,104  
  

 

 

   

 

 

 

Total investments

     278,493       230,760  
  

 

 

   

 

 

 

Cash and cash equivalents

     3,942       2,916  

Receivable for investments sold

     25       12  

Interest receivable

     3,458       5,027  

Due from portfolio company

     355       204  

Due from affiliates

     295       692  

Prepaid expenses and other assets

     62       302  
  

 

 

   

 

 

 

Total assets

   $ 286,630     $ 239,913  
  

 

 

   

 

 

 

Liabilities

    

Notes payable 6.50% due September 18, 2022 (including unamortized discount of $1,290 and $1,435, respectively)

   $ 31,342     $ 31,196  

Notes payable 6.75% due January 31, 2025 (including unamortized discount of $1,826 and $0, respectively)

     44,572       —    

Payable for investments purchased

     77,681       66,165  

Interest payable

     354       354  

Distributions payable

     884       3,015  

Due to affiliates

     5,290       6,193  

Accrued expenses and other liabilities

     916       703  
  

 

 

   

 

 

 

Total liabilities

   $ 161,039     $ 107,626  
  

 

 

   

 

 

 

Commitments and contingencies (Note 6)

   $ —       $ —    

Net Assets

    

Common stock, par value $0.01 per share (100,000,000 shares authorized, 10,652,401 and 10,652,401 shares issued and outstanding, respectively)

   $ 107     $ 107  

Additional paid-in capital

     198,426       198,426  

Accumulated net realized losses

     (32,201     (33,328

Undistributed net investment income

     9,138       4,499  

Net unrealized depreciation on investments

     (49,879     (37,417
  

 

 

   

 

 

 

Total net assets

   $ 125,591     $ 132,287  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 286,630     $ 239,913  
  

 

 

   

 

 

 

Net asset value per share

   $ 11.79     $ 12.42  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Dollar amounts in thousands (except per share amounts)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2018     2017     2018     2017  

Investment Income:

        

Interest income from:

        

Non-affiliated, non-controlled investments

   $ 3,925     $ 5,561     $ 7,037     $ 12,042  

Non-affiliated, non-controlled investments (PIK)

     —         —         —         —    

Affiliated investments

     777       (90     1,198       48  

Affiliated investments (PIK)

     1,514       —         4,567       —    

Controlled investments

     555       —         1,110       —    

Controlled investments (PIK)

     211       667       435       874  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     6,982       6,138       14,347       12,964  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend income from non-affiliated, non-controlled investments

     49       85       155       131  

Other income from:

        

Non-affiliated, non-controlled investments

     29       14       42       457  

Affiliated investments

     87       —         90       —    

Controlled investments

     15       —         26       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     131       14       158       457  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

   $ 7,162     $ 6,237     $ 14,660     $ 13,552  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Management fees

   $ 754     $ 546     $ 1,447     $ 1,139  

Incentive fees

     (2,149     871       (1,183     1,894  

Administration fees

     487       272       797       767  

Custody fees

     15       11       29       24  

Directors’ fees

     50       21       99       48  

Professional services

     294       176       465       507  

Interest expense

     1,456       631       2,731       1,262  

Other expenses

     177       156       331       269  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,084       2,684       4,716       5,910  

Accrued administration fee waiver

     —         75       —         70  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

   $ 1,084     $ 2,759     $ 4,716     $ 5,980  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 6,078     $ 3,478     $ 9,944     $ 7,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investment transactions:

        

Net realized gain (loss) from:

        

Non-affiliated, non-controlled investments

   $ 810     $ 1,381     $ 917     $ 3,361  

Affiliated investments

     —         —         —         —    

Controlled investments

     —         —         210       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     810       1,381       1,127       3,361  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) from:

        

Non-affiliated, non-controlled investments

     2,527       (5,247     (1,888     (5,990

Affiliated investments

     (6,566     (429     (10,062     (2,020

Controlled investments

     (201     (1,650     (512     (2,011
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net change in unrealized appreciation (depreciation)

     (4,240     (7,326     (12,462     (10,021
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

   $ (3,430   $ (5,945   $ (11,335   $ (6,660
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 2,648     $ (2,467   $ (1,391   $ 912  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per share (basic and diluted):

   $ 0.57     $ 0.29     $ 0.93     $ 0.61  

Earnings per share (basic and diluted):

   $ 0.25     $ (0.20   $ (0.13   $ 0.07  

Weighted average shares outstanding (basic and diluted):

     10,652,401       12,000,803       10,652,401       12,316,884  

The accompanying notes are an integral part of these financial statements.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

Dollar amounts in thousands

 

     For the Six Months Ended
June 30,
 
     2018     2017  

Increase (decrease) in net assets resulting from operations:

    

Net investment income

   $ 9,944     $ 7,572  

Net realized gain (loss) on investments

     1,127       3,361  

Net change in unrealized appreciation (depreciation) on investments

     (12,462     (10,021
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     (1,391     912  
  

 

 

   

 

 

 

Distributions to stockholders from:

    

Net investment income

     (5,305     (6,098
  

 

 

   

 

 

 

Total distributions to stockholders

     (5,305     (6,098
  

 

 

   

 

 

 

Capital transactions:

    

Purchases of common stock

     —         (14,096
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     —         (14,096
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     (6,696     (19,282
  

 

 

   

 

 

 

Net assets at beginning of period

   $ 132,287     $ 172,984  
  

 

 

   

 

 

 

Net assets at end of period

   $ 125,591     $ 153,702  
  

 

 

   

 

 

 

Undistributed net investment income

   $ 9,138     $ 2,809  

Capital share activity

    

Shares outstanding at the beginning of the period

     10,652,401       12,790,880  

Shares purchased

     —         (1,222,325
  

 

 

   

 

 

 

Shares outstanding at the end of the period

     10,652,401       11,568,555  

 

The accompanying notes are an integral part of these financial statements.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollar amounts in thousands

 

     For the Six Months
Ended June  30,
 
     2018     2017  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ (1,391   $ 912  

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities:

    

Purchases of investments

     (93,112     (92,990

Increase (decrease) in payable for investments purchased

     11,516       (1,864

Net change in short-term investments

     (13,310     (73,943

Payment-in-kind income

     (8,035     (4,256

Proceeds from sales of investments

     49,425       53,244  

(Increase) decrease in receivable for investments sold

     (13     9,406  

Proceeds from principal payments

     7,373       63,085  

Net realized (gain) loss on investments

     (1,127     (3,361

Net change in unrealized (appreciation) depreciation on investments

     12,462       10,021  

Amortization of premium and accretion of discount, net

     (1,409     (2,694

Amortization of discount (premium) on long term debt

     270       (126

Increase (decrease) in operating assets and liabilities:

    

(Increase) decrease in principal receivable

     —         786  

(Increase) decrease in interest receivable

     1,569       1,386  

(Increase) decrease in dividends receivable

     —         (36

(Increase) decrease in deposit at broker

     —         (47

(Increase) decrease in due from portfolio company

     (151     230  

(Increase) decrease in due from affiliates

     397       80  

(Increase) decrease in prepaid expenses and other assets

     240       (27

Increase (decrease) in due to affiliates

     (903     458  

Increase (decrease) in accrued expenses and other liabilities

     213       (820
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (35,986     (40,556
  

 

 

   

 

 

 

Cash flows from financing activities

    

Purchases of common stock

     —         (14,096

Issuance of GECCM Notes payable

     44,448       —    

Distributions paid

     (7,436     (7,261
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     37,012       (21,357
  

 

 

   

 

 

 

Net increase (decrease) in cash

     1,026       (61,913

Cash, beginning of period

     2,916       66,782  
  

 

 

   

 

 

 

Cash, end of period

   $ 3,942     $ 4,869  
  

 

 

   

 

 

 

Supplemental disclosure of non-cash financing activities :

    

Dividends declared, not yet paid

   $ 884     $ 960  

Supplemental disclosure of cash flow information:

    

Cash paid for excise tax

   $ 120     $ —    

Cash paid for interest

   $ 2,461     $ 1,388  

 

The accompanying notes are an integral part of these financial statements.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)

June 30, 2018

Dollar amounts in thousands

 

Portfolio Company

 

Security

 

Industry

 

Interest (1)

  Maturity     Par Amount
/Quantity
    Cost     Fair
Value
    % of
NAV
 

Investments at Fair Value - 221.75% of Net Assets (2)

               

Controlled Investments - 16.25% of Net Assets (3)

               

PE Facility Solutions, LLC

  1st Lien, Senior Secured Revolver (5),(15)   Building Cleaning and Maintenance Services   11.09% (L + 9.00%) (6)     02/27/2022       3,679     $ 3,679     $ 3,679       2.93

San Diego, CA

  1st Lien, Senior Secured Revolver - Unfunded (5),(15)     11.09% (L + 9.00%) (6)     02/27/2022       2,321       —         —         —  
  1st Lien, Senior Secured Loan A (5),(15)     13.09% (L + 11.00%) (6)     02/27/2022       9,900       9,900       9,900       7.88
  1st Lien, Senior Secured Loan B (5),(15)     16.09% (L + 14.00%) (6),(7)     02/27/2022       6,171       5,897       5,187       4.13
  Common Equity (5),(8),(15)           1       —         —         —  
           

 

 

   

 

 

   

 

 

 
              19,476       18,766       14.94
           

 

 

   

 

 

   

 

 

 

The Finance Company

  1st Lien, Senior Secured Revolver (5)   Consumer Finance   13.09% (L + 11.00%, 11.50% Floor) (6)     07/02/2020       535       535       535       0.43

Silver Springs, MD

  1st Lien, Senior Secured Unfunded Loan (5)     13.09% (L + 11.00%, 11.50% Floor) (6)     07/02/2020       465       —         —         —  
  2nd Lien Secured Term Loan B (5),(30)     13.09% (L + 11.00%, 11.50% Floor) (6)     07/02/2020       1,491       1,491       1,108       0.88
  Equity (5),(8),(30)           288,000       —         —         —  
           

 

 

   

 

 

   

 

 

 
              2,026       1,643       1.31
           

 

 

   

 

 

   

 

 

 

Total Controlled Investments

              21,502       20,409       16.25
           

 

 

   

 

 

   

 

 

 

Affiliate Investments - 33.43% of Net Assets (4)

               

Avanti Communications Group PLC

  2nd Lien, Senior Secured Bond (10),(11)   Wireless Telecommunications Services   9.00%     10/01/2022       37,126       32,800       28,216       22.47

London, UK

  Common Equity (8),(10)           196,086,410       50,660       13,734       10.93
           

 

 

   

 

 

   

 

 

 
              83,460       41,950       33.40
           

 

 

   

 

 

   

 

 

 

OPS Acquisitions Limited and Ocean Protection Services Limited

  1st Lien, Senior Secured Loan (5),(10),(16)   Maritime Security Services   14.09% (L + 12.00%, 12.50% Floor) (6),(9)     06/01/2018       4,903       4,240       34       0.03

London, UK

  Common Equity (5),(8),(10),(16)           19       —         —         —  
           

 

 

   

 

 

   

 

 

 
              4,240       34       0.03
           

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

              87,700       41,984       33.43
           

 

 

   

 

 

   

 

 

 

 

F-6


Table of Contents
Index to Financial Statements

Portfolio Company

 

Security

 

Industry

 

Interest (1)

  Maturity     Par Amount
/Quantity
    Cost     Fair
Value
    % of
NAV
 

Non-Affiliated, Non-Controlled Investments - 109.01% of Net Assets

               

Almonde, Inc.

  2nd Lien, Senior Secured
Loan (10),(17)
  Software Services  

9.59% (L + 7.25%,

8.25% floor) (13)

    06/13/2025       10,000       9,953       9,616       7.66

Philadelphia, PA

               

Aptean Holdings, Inc.

  2nd Lien, Senior Secured Loan (5),(29)   Software Services   11.84% (L + 9.50%, 10.50% Floor) (13)     12/02/2023       4,010       4,054       4,030       3.21

Alpharetta, GA

               

Commercial Barge Line Company

  1st Lien, Senior Secured Loan (18)   Water Transport   10.84% (L + 8.75%, 9.75% Floor) (6)     11/12/2020       9,000       7,544       6,206       4.94

Jeffersonville, IN

               

Davidzon Radio, Inc.

  1st Lien, Senior Secured Loan (5),(16)   Radio Broadcasting   15.09% (L + 10.00%, 11.00% Floor) (6),(12)     03/31/2020       9,471       9,047       8,869       7.06

Brooklyn, NY

               

Foresight Energy LP

  1st Lien, Senior Secured Loan (27)   Oil, Gas & Coal  

8.09% (L + 5.75%,

6.75% floor) (13)

    03/28/2022       4,647       4,594       4,611       3.67

Saint Louis, MO

               

Full House Resorts, Inc.

  1st Lien Senior Secured Note (5),(25)   Gaming, Lodging & Restaurants  

9.34% (L + 7.00%,

8.00% floor) (13)

    02/02/2024       9,950       9,761       9,801       7.80

Las Vegas, NV

               

Geo Specialty Chemicals, Inc.

  1st Lien, Senior Secured
Revolver (5),(19)
  Chemicals  

6.84% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       3,938       3,804       3,833       3.05

Lafayette, Indiana

  1st Lien, Senior Secured Revolver -
Unfunded (5),(19)
   

6.84% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       438       —         (12     (0.01 )% 
  1st Lien, Senior Secured Loan (5),(19)    

6.84% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       5,906       5,726       5,750       4.58
           

 

 

   

 

 

   

 

 

 
              9,530       9,571       7.62
           

 

 

   

 

 

   

 

 

 

International Wire Group Inc.

  2nd Lien, Senior Secured Bond (11)   Manufacturing   10.75%     08/01/2021       17,500       16,476       16,450       13.10

Camden, NY

               

Luling Lodging, LLC

  1st Lien, Senior Secured Loan (5),(16)   Hotel Operator   19.09% (L + 12.00%, 12.25% Floor) (6),(9),(12)     12/18/2017       2,715       1,300       2,574       2.05

Luling, TX

               

Michael Baker International, LLC

  2nd Lien, Senior Secured Bond (11)   Industrial Conglomerates   8.75%     03/01/2023       14,500       14,044       14,138       11.26

Pittsburgh, PA

               

NANA Development Corp.

  1st Lien, Senior Secured Bond (11)   Industrial Other   9.50%     03/15/2019       3,308       3,284       3,316       2.64
Anchorage, AK                
PEAKS Trust 2009-1   1st Lien, Senior Secured
Loan (5),(10),(16)
  Consumer Finance  

7.59% (L + 5.50%,

7.50% Floor) (6)

    01/27/2020       1,242       942       805       0.64
Carmel, IN                
PR Wireless, Inc.   1st Lien, Senior Secured Delayed Draw Loan (5),(20)   Wireless Communications   7.59% (L + 5.25%) (13)     06/29/2020       274       274       275       0.22
Guaynabo, PR   1st Lien, Senior Secured Unfunded Delayed Draw Loan (5),(20)     7.59% (L + 5.25%) (13)     06/29/2020       1,098       —         (3     (0.0 )% 
           

 

 

   

 

 

   

 

 

 
              274       272       0.22
           

 

 

   

 

 

   

 

 

 

RiceBran Technologies Corporation

  Warrants (5),(8),(16)   Grain Mill Products   $1.60 Strike Price     05/12/2020       300,000       145       237       0.19
Scottsdale, AZ                

SESAC Holdco II LLC

  2nd Lien, Senior Secured Loan (5),(21)   Business Services   9.34% (L + 7.25%) (6)     02/24/2025       7,295       7,244       7,291       5.81
Nashville, TN                

 

F-7


Table of Contents
Index to Financial Statements

Portfolio Company

 

Security

 

Industry

 

Interest (1)

  Maturity     Par Amount
/Quantity
    Cost     Fair
Value
    % of
NAV
 

Sungard Availability Services Capital, Inc.

  1st Lien, Senior Secured Loan (22)   Technology Services   12.09% (L + 10.00%, 11.00% Floor) (6)     10/01/2022       8,880       8,565       8,729       6.95
Wayne, PA   1st Lien, Senior Secured Loan (5),(24)    

9.09% (L + 7.00%,

8.00% Floor) (6)

    9/30/2021       4,900       4,565       4,577       3.64
           

 

 

   

 

 

   

 

 

 
              13,130       13,306       10.59
           

 

 

   

 

 

   

 

 

 
Tallage Davis, LLC   1st Lien, Senior Secured Loan (5),(26)   Real Estate Services   11.00%     01/26/2023       3,100       3,100       3,083       2.45
Boston, MA   1st Lien, Senior Secured Loan - Unfunded (5),(26)     11.00%     01/26/2023       11,000       —         (61     (0.05 )% 
           

 

 

   

 

 

   

 

 

 
              3,100       3,022       2.40
           

 

 

   

 

 

   

 

 

 

Tallage Lincoln, LLC

  1st Lien, Senior Secured Loan (5),(16)   Real Estate Services   12.34% (L + 10.00%, 11.00% Floor) (13)     12/31/2019       4,298       4,299       4,279       3.41
Boston, MA   1st Lien, Senior Secured Loan -
Unfunded (5),(16)
    12.34% (L + 10.00%, 11.00% Floor) (13)     12/31/2019       2,250       —         (10     (0.01 )% 
           

 

 

   

 

 

   

 

 

 
              4,299       4,269       3.40
           

 

 

   

 

 

   

 

 

 

The Selling Source, LLC

  1st Lien, Senior Secured
Loan (5),(16),(23)
  Information and Data Services   17.00% (9.00% PIK, 8.00% Cash) (7),(9)     12/31/2017       5,689       4,202       4,841       3.85

Las Vegas, NV

               

Tru Taj, LLC

  1st Lien, Senior Secured Bond (11)   Retail   12.00%     08/15/2021       16,000       15,346       11,960       9.52

Wayne, NJ

  1st Lien, Debtor in Possession Note (5),(28)     11.00%     01/22/2019       1,655       1,703       1,725       1.37
           

 

 

   

 

 

   

 

 

 
              17,049       13,685       10.90
           

 

 

   

 

 

   

 

 

 

Total Non-Affiliated, Non-Controlled Investments

              139,972       136,910       109.01
         

 

 

   

 

 

   

 

 

 

Short-Term Investments - 63.06% of Net Assets

               

State Street Institutional Treasury Money Market Fund

 

Premier Class

          4,531,772       4,532       4,532       3.61

United States Treasury

 

Treasury Bill

    1.90%     9/27/2018       75,000       74,666       74,658       59.45
           

 

 

   

 

 

   

 

 

 

Total Short-Term Investments

              79,198       79,190       63.06
           

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS (14) - 221.75% of Net Assets

            $ 328,372     $ 278,493       221.75
         

 

 

   

 

 

   

 

 

 

Other Liabilities in Excess of Assets - (121.75)% of Net Assets

              $ (152,902     (121.75 )% 

NET ASSETS

              $ 125,591       100.00
             

 

 

   

 

 

 

 

(1)

A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (‘‘London Interbank Offered Rate’’) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2018. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(2)

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. No unrestricted securities of the same issuer are outstanding.

 

F-8


Table of Contents
Index to Financial Statements
(3)

‘‘Controlled Investments’’ are investments in those companies that are ‘‘Controlled Investments’’ of the Company, as defined in the Investment Company Act. A company is deemed to be a ‘‘Controlled Investment’’ of the Company if the Company owns more than 25% of the voting securities of such company.

(4)

‘‘Affiliate Investments’’ are investments in those companies that are ‘‘Affiliated Companies’’ of the Company, a defined in the Investment Company Act, which are not ‘‘Controlled Investments.’’ A company is deemed to be an ‘‘Affiliate’’ of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.

(5)

Investments classified as Level 3 whereby fair value was determined by the Company’s board of directors.

(6)

The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of June 30, 2018 was 2.09%.

(7)

Security pays, or has the option to pay, all of its interest in kind.

(8)

Non-income producing security.

(9)

Investment was on non-accrual status as of June 30, 2018.

(10)

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 18.28% were non-qualifying assets as of June 30, 2018.

(11)

Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.

(12)

The interest rate on these loans includes a default interest rate.

(13)

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of June 30, 2018 was 2.34%.

(14)

As of June 30, 2018, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,691; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $52,535; the net unrealized depreciation was $50,884; the aggregate cost of securities for Federal income tax purposes was $329,337.

(15)

Restricted security initially obtained on February 28, 2017.

(16)

Restricted security initially obtained on November 3, 2016.

(17)

Restricted security initially obtained on December 14, 2017.

(18)

Restricted security initially obtained on May 17, 2017.

(19)

Restricted security initially obtained on September 28, 2017.

(20)

Restricted security initially obtained on November 15, 2017.

(21)

Restricted security initially obtained on December 13, 2017.

(22)

Restricted security initially obtained on December 20, 2017.

(23)

Loan defaulted on January 1, 2018.

(24)

Restricted security initially obtained on January 24, 2018.

(25)

Restricted security initially obtained on February 2, 2018.

(26)

Restricted security initially obtained on March 20, 2018.

(27)

Restricted security initially obtained on March 22, 2018.

(28)

Restricted security initially obtained on March 26, 2018.

(29)

Restricted security initially obtained on March 27, 2018.

(30)

Restricted security initially obtained on June 8, 2018

L = LIBOR

As of June 30, 2018, the Company’s investments consisted of the following:

 

Investment Type

   Investments at
Fair Value
     Percentage of
Net Assets
 

Fixed Income

   $ 185,332        147.57

Equity/Other

     13,971        11.13

Short-Term Investments

     79,190        63.05
  

 

 

    

 

 

 

Total

   $ 278,493        221.75
  

 

 

    

 

 

 

 

F-9


Table of Contents
Index to Financial Statements

As of June 30, 2018, the industry composition of the Company’s portfolio, excluding short-term investments, at fair value was as follows:

 

Industry

   Investments at
Fair Value
     Percentage of
Net Assets
 

Wireless Telecommunication Services

   $ 41,950        33.40

Building Cleaning and Maintenance Services

     18,766        14.94

Manufacturing

     16,450        13.10

Industrial Conglomerates

     14,138        11.26

Retail

     13,685        10.90

Software Services

     13,646        10.87

Technology Services

     13,306        10.59

Gaming, Lodging & Restaurants

     9,801        7.80

Chemicals

     9,571        7.62

Radio Broadcasting

     8,869        7.06

Real Estate Services

     7,291        5.81

Business Services

     7,291        5.81

Water Transport

     6,206        4.94

Information and Data Services

     4,841        3.85

Oil, Gas & Coal

     4,611        3.67

Industrial Other

     3,316        2.64

Hotel Operator

     2,574        2.05

Consumer Finance

     2,448        1.95

Wireless Communications

     272        0.22

Grain Mill Products

     237        0.19

Maritime Security Services

     34        0.03

Short-Term Investments

     79,190        63.05
  

 

 

    

 

 

 

Total

   $ 278,493        221.75
  

 

 

    

 

 

 

As of June 30, 2018, 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

   $ 236,509        188.32

United Kingdom

     41,984        33.43
  

 

 

    

 

 

 

Total

   $ 278,493        221.75
  

 

 

    

 

 

 

 

F-10


Table of Contents
Index to Financial Statements

GREAT ELM CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

Dollar amounts in thousands

 

Portfolio Company

 

Security

 

Industry

 

Interest (2)

  Maturity     Par
Amount /

Quantity
    Cost     Fair
Value
    % of
NAV
 

Investments at Fair Value - 174.43% of Net Assets (1)

               

Controlled Investments - 13.68% of Net Assets (3)

               

PE Facility Solutions, LLC

  1st Lien, Senior Secured Revolver (5),(15)   Building Cleaning and Maintenance Services   11.38% (L + 10.00%) (6)     02/27/2022       —       $ —       $ —         —    

San Diego, CA

  1st Lien, Senior Secured Revolver -Unfunded (5),(15)     11.38% (L + 10.00%) (6)     02/27/2022       3,000       —         —         —    
  1st Lien, Senior Secured Loan A (5),(15)     12.38% (L + 11.00%) (6)     02/27/2022       9,900       9,900       9,900       7.48
  1st Lien, Senior Secured Loan B (5),(15)     15.38% (L + 14.00%) (6),(7)     02/27/2022       9,105       8,587       8,204       6.20
  Common Equity (5),(8),(15)           1       —         —         —    
           

 

 

   

 

 

   

 

 

 
              18,487       18,104       13.68
           

 

 

   

 

 

   

 

 

 

Total Controlled Investments

              18,487       18,104       13.68
           

 

 

   

 

 

   

 

 

 

Affiliate Investments - 1.34% of Net Assets (4)

               

OPS Acquisitions Limited and Ocean Protection Services Limited

  1st Lien, Senior Secured Loan (5),(10),(16)   Maritime Security Services   16.38% (L + 12.00%, 12.50% Floor) (6),(7),(9)     06/01/2018       4,903       4,240       1,770       1.34

London, UK

  Common Equity (5),(8),(10),(16)           19       —         —         —    
           

 

 

   

 

 

   

 

 

 
              4,240       1,770       1.34
           

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

              4,240       1,770       1.34
           

 

 

   

 

 

   

 

 

 

Non-Affiliated, Non-Controlled Investments - 109.60% of Net Assets

               

Almonde, Inc.

  2nd Lien, Senior Secured Loan (5),(10),(17)   Software Services  

8.94% (L + 7.25%,

8.25% floor)(13)

    06/13/2025       5,000       5,037       5,005       3.78

Philadelphia, PA

               

Avanti Communications Group PLC

  2nd Lien, Senior Secured Bond (10),(11)   Wireless Telecommunications Services   12.50%     10/01/2021       34,917       30,427       28,807       21.78

London, UK

  3rd Lien, Senior Secured Bond (10),(11)    

14.50% (20.00%

if PIK election is made) (7)

    10/01/2023       54,113       45,011       13,257       10.02
  Common Equity (8),(10)           1,829,496       23       213       0.16
           

 

 

   

 

 

   

 

 

 
              75,461       42,277       31.96
           

 

 

   

 

 

   

 

 

 

Commercial Barge Line Company

  1st Lien, Senior Secured Loan (5),(18)   Water Transport  

10.32% (L + 8.75%,

9.75% Floor) (6)

    11/12/2020       9,254       7,551       5,279       3.99

Jeffersonville, IN

               

Davidzon Radio, Inc.

  1st Lien, Senior Secured Loan (5),(16)   Radio Broadcasting  

14.38% (L + 10.00%,

11.00% Floor) (6),(14)

    03/31/2020       9,685       9,144       8,876       6.71

Brooklyn, NY

               

Geo Specialty Chemicals, Inc.

  1st Lien, Senior Secured Revolver (5),(19)   Chemicals  

6.28% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       3,646       3,465       3,500       2.64

Lafayette, Indiana

  1st Lien, Senior Secured Revolver - Unfunded (5),(19)    

6.28% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       729       (29     (29     (0.02 %) 
  1st Lien, Senior Secured Loan (5),(19)    

6.28% (L + 4.75%,

5.75% Floor) (6)

    04/30/2019       6,563       6,248       6,300       4.76
           

 

 

   

 

 

   

 

 

 
              9,684       9,771       7.38
           

 

 

   

 

 

   

 

 

 

International Wire Group Inc.

  2nd Lien, Senior Secured Bond (11)   Manufacturing   10.75%     08/01/2021       13,000       12,071       11,960       9.04

Camden, NY

               

 

F-11


Table of Contents
Index to Financial Statements

Portfolio Company

 

Security

 

Industry

 

Interest (2)

  Maturity     Par
Amount /

Quantity
    Cost     Fair
Value
    % of
NAV
 

Luling Lodging, LLC

  1st Lien, Senior Secured Loan (5),(16)   Hotel Operator  

18.38% (L + 12.00%,

12.25% Floor) (6),(9),(12)

    12/18/2017       2,715       1,300       1,605       1.21

Luling, TX

               

Michael Baker International, LLC

  2nd Lien, Senior Secured Bond (11)   Industrial Conglomerates   8.75%     03/01/2023       5,000       4,876       4,838       3.66

Pittsburgh, PA

               

NANA Development Corp.

  1st Lien, Senior Secured Bond (11)   Industrial Other   9.50%     03/15/2019       7,000       6,902       7,070       5.34

Anchorage, AK

               

PEAKS Trust 2009-1

  1st Lien, Senior Secured Loan (5),(10),(16)   Consumer Finance  

7.50% (L + 5.50%,

7.50% Floor) (6)

    01/27/2020       1,462       1,020       878       0.67

Carmel, IN

               

PR Wireless, Inc.

  1st Lien, Senior Secured Loan (5),(16)   Wireless Communications   6.94% (L + 5.25%) (13)     06/29/2020       9,754       8,908       9,749       7.37

Guaynabo, PR

  1st Lien, Senior Secured Delayed Draw Loan (5),(20)     8.75% (Prime Rate + 4.25%) (13)     06/29/2020       274       274       274       0.21
  1st Lien, Senior Secured Unfunded Delayed Draw Loan (5),(20)     8.75% (Prime Rate + 4.25%) (13)     06/29/2020       1,098       —         —      
           

 

 

   

 

 

   

 

 

 
              9,182       10,023       7.58
           

 

 

   

 

 

   

 

 

 

RiceBran Technologies Corporation

  Warrants (5),(8),(16)   Grain Mill Products   $1.60 Strike Price     05/12/2020       300,000       145       136       0.10

Scottsdale, AZ

               

SESAC Holdco II LLC

  2nd Lien, Senior Secured Loan (5),(21)   Business Services   8.94% (L+7.25%) (13)     02/24/2025       4,150       4,103       4,156       3.14

Nashville, TN

               

Sungard Availability Services Capital, Inc.

  1st Lien, Senior Secured Loan (5),(22)   Technology Services   11.69% (L+10.00%) (13)     10/01/2022       6,000       5,700       5,952       4.50

Wayne, PA

               

Tallage Lincoln, LLC.

  1st Lien, Senior Secured Loan (5),(16)   Real Estate Services  

11.69% (L + 10.00%,

11.00% Floor) (13)

    12/31/2019       5,723       5,725       5,718       4.32

Boston, MA

  1st Lien, Senior Secured Loan - Unfunded (5),(16)    

11.69% (L + 10.00%,

11.00% Floor) (13)

    12/31/2019       2,250       —         —         —    
           

 

 

   

 

 

   

 

 

 
              5,725       5,718       4.32
           

 

 

   

 

 

   

 

 

 

The Finance Company

  1st Lien, Senior Secured Loan (5),(16)   Consumer Finance  

17.88% (L + 13.50%,

14.00% Floor) (6),(12)

    03/31/2018       2,191       2,191       1,993       1.51

Silver Springs, MD

  1st Lien, Senior Secured Unfunded Loan (5),(16)    

17.88% (L + 13.50%,

14.00% Floor) (6),(12)

    03/31/2018       709       —         —         —    
           

 

 

   

 

 

   

 

 

 
              2,191       1,993       1.51
           

 

 

   

 

 

   

 

 

 

The Selling Source, LLC

  1st Lien, Senior Secured Loan (5),(16),(23)   Information and Data Services  

17.00% (9.00% PIK),

(8.00% Cash) (7),(9)

    12/31/2017       5,689       4,202       4,659       3.52

Las Vegas, NV

               

Tru Taj, LLC

  1st Lien, Senior Secured Bond (11)   Retail   12.00%     08/15/2021       16,000       15,264       14,800       11.19

Wayne, NJ

               
           

 

 

   

 

 

   

 

 

 

Total Non-Affiliated, Non-Controlled Investments

              179,558       144,996       109.60

Short-Term Investments - 49.81% of Net Assets

               

State Street Institutional Treasury Money Market Fund

  Money Market Mutual Fund           16,052,817       16,053       16,053       12.13

United States Treasury

  Treasury Bill         3/29/2018       50,000       49,839       49,837       37.67
           

 

 

   

 

 

   

 

 

 

Total Short-Term Investments

              65,892       65,890       49.80
           

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS (14) - 174.43% of Net Assets

            $ 268,177     $ 230,760       174.43
           

 

 

   

 

 

   

 

 

 

Other Liabilities in Excess of Assets - (74.43)% of Net Assets

              $ (98,473     (74.43 %) 

NET ASSETS

              $ 132,287       100.00
             

 

 

   

 

 

 

 

(1)  

The 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.

 

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Index to Financial Statements
(2)  

A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (‘‘London Interbank Offered Rate’’) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of December 31, 2017. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(3)  

‘‘Controlled Investments’’ are investments in those companies that are ‘‘Controlled Investments’’ of the Company, as defined in the Investment Company Act. A company is deemed to be a ‘‘Controlled Investment’’ of the Company if the Company owns more than 25% of the voting securities of such company.

(4)

‘‘Affiliate Investments’’ are investments in those companies that are ‘‘Affiliated Companies’’ of the Company, a defined in the Investment Company Act, which are not ‘‘Controlled Investments.’’ A company is deemed to be an ‘‘Affiliate’’ of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.

(5)  

Investments classified as Level 3 whereby fair value was determined by the Company’s board of directors.

(6)  

The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2017 was 1.56%.

(7)  

Security pays, or has the option to pay, all of its interest in kind.

(8)

Non-income producing security.

(9)  

Investment was on non-accrual status as of December 31, 2017.

(10)  

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 20.82% were non-qualifying assets as of December 31, 2017.

(11)  

Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.

(12)  

The interest rate on these loans includes a default interest rate.

(13)  

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2017 was 1.69%.

(14)  

As of December 31, 2017, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,353; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $25,103; the net unrealized depreciation was $22,750; the aggregate cost of securities for Federal income tax purposes was $253,510.

(15)  

Restricted security initially obtained on February 28, 2017.

(16)  

Restricted security initially obtained on November 3, 2016.

(17)  

Restricted security initially obtained on December 14, 2017.

(18)  

Restricted security initially obtained on May 17, 2017.

(19)  

Restricted security initially obtained on September 28, 2017.

(20)  

Restricted security initially obtained on November 15, 2017.

(21)  

Restricted security initially obtained on December 13, 2017.

(22)  

Restricted security initially obtained on December 20, 2017.

(23)  

Loan defaulted on January 1, 2018.

L = LIBOR

As of December 31, 2017 the Company’s investments consisted of the following:

 

Investment Type

   Investments at
Fair Value
     Percentage of
Net Assets
 

1st Lien/Senior Secured Debt

   $ 164,521        124.36

Equity/Other

     349        0.26

Short-term investments

     65,890        49.81
  

 

 

    

 

 

 

Total Long Term Investments

   $ 230,760        174.43
  

 

 

    

 

 

 

 

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Index to Financial Statements

As of December 31, 2017 the industry composition of the Company’s portfolio at fair value was as follows:

 

     Investments at
Fair Value
     Percentage of
Net Assets
 

Wireless Telecommunications Services

   $ 42,277        31.96

Building Cleaning and Maintenance Services

     18,104        13.68

Retail

     14,800        11.19

Manufacturing

     11,960        9.04

Wireless Communications

     10,023        7.58

Chemicals

     9,771        7.39

Radio Broadcasting

     8,876        6.71

Industrial Other

     7,070        5.34

Technology Services

     5,952        4.50

Real Estate Services

     5,718        4.32

Water Transport

     5,279        3.99

Software Services

     5,005        3.78

Industrial Conglomerates

     4,838        3.66

Information and Data Services

     4,659        3.52

Business Services

     4,156        3.14

Consumer Finance

     2,871        2.17

Maritime Security Services

     1,770        1.34

Hotel Operator

     1,605        1.21

Grain Mill Products

     136        0.10

Short-term investments

     65,890        49.81
  

 

 

    

 

 

 

Total

   $ 230,760        174.43
  

 

 

    

 

 

 

As of December 31, 2017 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

   $ 186,713        141.14

United Kingdom

     44,047        33.29
  

 

 

    

 

 

 

Total

   $ 230,760        174.43
  

 

 

    

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-14


Table of Contents
Index to Financial Statements

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.

The Company and Full Circle Capital Corporation, a Maryland corporation (“Full Circle”), entered into an Agreement and Plan of Merger, dated as of June 23, 2016 (the “Merger Agreement”). The Merger Agreement provided for the merger of Full Circle with and into the Company (the “Merger”). The Company agreed to provide indemnity to Full Circle’s directors and officers under certain circumstances. The Company has concluded that its indemnification obligation is remote as of the date of the accompanying financial statements. The Merger was completed on November 3, 2016 and the Company began operations on November 4, 2016. The Company accounted for the Merger as a business combination under Accounting Standards Codification (ASC) Topic 805, Business Combinations (“ASC 805”). The consideration for the Merger consisted of 4,986,585 shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”).

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation . The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X and Regulation S-K. The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification Topic 946, Financial Services – Investment Companies .

Basis of Consolidation . Under the Investment Company Act, Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, the Company is generally precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to the Company. The accompanying consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned, or previously wholly-owned, subsidiaries, TFC-SC Holdings, LLC, PE Facility Solutions, LLC and Double Deuce Lodging LLC. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates . The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Revenue Recognition . Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original

 

F-15


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Index to Financial Statements

issue discounts, earned with respect to capital commitments, are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. The Company currently has no investments with fixed exit fees. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are generally included in interest income.

Interest Income received as payment-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. For debt instruments where the Company received original issue discounts, when principal payments on the debt instrument are received in an amount in excess of the debt instrument’s amortized cost, the excess principal payments are recorded as interest income.

Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) . The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the first-in, first-out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Organization and Merger Related Costs . Organization and Merger-related costs, including costs relating to the formation and incorporation of the business, were deemed to be incurred by the Company only subsequent to the Merger being completed.

Cash and Cash Equivalents . Cash and cash equivalents typically consist of bank demand deposits.

Valuation of Portfolio Investments . The Company carries its investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Company’s board of directors (the “Board of Directors”).

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 4.

The Company values its portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by the Board of Directors. Fair value is defined as the price that

 

F-16


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Index to Financial Statements

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 of Directors, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may 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 our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where the Company believes that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security.

The valuation process approved by the Board of Directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:

 

   

The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to an independent valuation firm (or firms) approved by the Board of Directors;

 

   

Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented, discussed, and iterated with senior management of GECM;

 

   

The fair value of investments comprising in the aggregate less than 5% of the 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 of Directors approves, the fair value of the investments in the Company’s portfolio in good faith based on the input of GECM, the respective independent valuation firms (to the extent applicable) and the inputs of each of the audit committee of the Board of Directors and the Board of Directors.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information

 

F-17


Table of Contents
Index to Financial Statements

generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.

Foreign Currency Translation . Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (1) investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates effective on the date of valuation; and (2) purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates prevailing on the transaction dates. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.

U.S. Federal Income Taxes . From inception to September 30, 2016, the Company was a taxable association under Internal Revenue Code of 1986, as amended (the “Code”). The Company has elected to be taxed as a regulated investment company (“RIC”) under subchapter M of the Code for the partial taxable period beginning on October 1, 2016 and ending December 31, 2016. The Company intends to operate in a manner so as to qualify for the tax treatment applicable to RICs in that taxable year and all future taxable years. In order to qualify as a RIC, among other things, the Company will be required to timely distribute to its stockholders at least 90% of investment company taxable income (“ICTI”) including PIK interest, as defined by the Code, for each taxable year. 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.

If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

The Company accrued $124 of excise tax expense in fiscal 2017 and has accrued $0 for fiscal 2018.

At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which will reduce its taxable income arising from future net realized gains on investment

 

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Index to Financial Statements

transactions, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Company of any liability for federal income tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of the capital loss carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term and $30,169 are long term.

ASC 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior years, as applicable), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.

Recent Accounting Developments

In March 2017, FASB issued ASU No. 2017-08; Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities . The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The application of this guidance is not expected to have a material impact on the accompanying consolidated financial statements and related disclosures.

3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES

Investment Management Agreement. On September 27, 2016, the Company entered into an investment management agreement (the “Investment Management Agreement”) with GECM. Beginning on November 4, 2016, the Company began accruing for GECM’s fees for its services under the Investment Management Agreement. This fee consists of two components: a base management fee and an incentive fee.

Management Fee The base management fee is calculated at an annual rate of 1.50% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee will be payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial quarter are prorated.

For the three and six months ended June 30, 2018 management fees amounted to $754 and $1,447, respectively. For the three and six months ended June 30, 2017 management fees amounted to $546 and $1,139, respectively. As of June 30, 2018 and December 31, 2017, $754 and $612 remained payable, respectively.

 

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Incentive Fee The incentive fee consists of two components, an investment income component and a capital gains component. Under the investment income component, on a quarterly basis, the Company will pay GECM 20% of the amount by which the Company’s pre-incentive fee net investment income (the “Pre-Incentive Fee Net Investment Income”) for the quarter exceeds a hurdle rate of 1.75% (7.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which GECM receives all of such income in excess of the 1.75% level but less than 2.1875% (8.75% annualized) and subject to a total return requirement (described below). The effect of the “catch-up” provision is that, subject to the total return provision, if pre-incentive fee net investment income exceeds 2.1875% of the Company’s net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Company’s pre-incentive fee net investment income as if the 1.75% hurdle rate did not apply. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.

Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Company and its consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee Net Investment Income does not include any realized capital gains or losses or unrealized capital appreciation or depreciation. Accrued Unpaid Income as of June 30, 2018 was $28,158. Accrued Unpaid Income includes PIK income of $8,035 capitalized during the six months ended June 30, 2018 and $5,002 of accrued interest income that is expected to PIK. Accrued Unpaid Income as of December 31, 2017 was $20,168. Accrued Unpaid Income as of December 31, 2017 includes PIK income of $11,709 capitalized during the year ended December 31, 2017 and $1,962 of accrued interest income that is expected to PIK under PIK toggle elections.

Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the “Accrued Unpaid Income Incentive Fees”) is deferred, on a security by security basis, and becomes payable only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (A) reduce Pre-Incentive Fee Net Investment Income and (B) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.

Under the capital gains component of the incentive fee, the Company is obligated to pay GECM at the end of each calendar year 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.

Payment of the income incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20% of the cumulative net increase in net assets resulting from operations from and after November 4, 2016 exceeds the cumulative incentive fees accrued and/or paid from and after November 4, 2016. For the purposes of this calculation, the “cumulative net increase in net assets resulting from operations” is the sum of the Company’s pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation from and after November 4, 2016.

For the six months ended June 30, 2018 and 2017, the Company incurred income incentive fees of $(1,183) and $1,894, respectively. For the six months ended June 30, 2018, the income incentive fees incurred include an accrual of $1,454 offset by a reversal of $2,637 of income incentive fees previously

 

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accrued (discussed further below). As of June 30, 2018 and December 31, 2017, $4,075 and $5,257, respectively, remained payable and at both dates $0 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 six months ended June 30, 2018 and the year ended December 31, 2017, the Company accrued Incentive Fees based on capital gains of $0.

GECC’s largest investment, Avanti Communications Group plc (Avanti), has generated significant non-cash income in the form of payment-in-kind (PIK) interest. In connection with the recent restructuring of Avanti completed on April 26, 2018, GECC’s investment in Avanti’s third lien notes was converted into Avanti common equity. As a result of this debt-for-equity conversion, we have determined that the accrued incentives fees payable associated with the portion of such PIK interest generated by the third lien notes should not at this time be recognized as a liability and as such we have reversed for prior periods. Notwithstanding this reversal, such incentives fees remain payable under the investment management agreement (subject to achievement of return hurdles) and will be recognized as expense to the extent that an exit or recovery results in gross proceeds to us in excess of our initial cost basis in the third lien notes.

The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as an investment adviser of the Company.

The Company’s chief executive officer is also 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 GEC.

Administration Fees . On September 27, 2016, the Company entered into an administration agreement (the “Administration Agreement”) with GECM to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping record keeping services and other administrative services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement.

GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the “Compensation Expenses”), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period. GECM’s expense cap was calculated retrospectively for the year ending November 4, 2017 and the cap on costs was determined to be $0 and $70 of the $80 accrued at December 31, 2016 was reversed for the year ended December 31, 2017 with $10 due from our sub-administrator remaining waived.

The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and

 

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its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.

For the six months ended June 30, 2018 and 2017, the Company incurred expenses under the Administration Agreement of $797 and $767, respectively. As of June 30, 2018 and December 31, 2017, $356 and $257 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.

 

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The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 and Level 3 Instruments.

Level 2 Instruments Valuation Techniques and Significant Inputs

 

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, certain state and municipal obligations, certain money market instruments and certain loan commitments.

 

Valuations of Level 2 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.

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.

 

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As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of June 30, 2018 and December 31, 2017 The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment (if any), call provisions and comparable company valuations. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively, in the fair value.

The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of June 30, 2018:

 

Assets

   Level 1      Level 2      Level 3      Total  

Fixed Income

   $ —        $ 103,242      $ 82,090      $ 185,332  

Equity/Other

     13,734        —          237        13,971  

Short Term Investments

     79,190        —          —          79,190  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment assets

   $ 92,924      $ 103,242      $ 82,327      $ 278,493  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2017:

 

Assets

   Level 1      Level 2      Level 3      Total  

Fixed Income

   $ —        $ 80,732      $ 83,789      $ 164,521  

Equity/Other

     213        —          136        349  

Short Term Investments

     65,890        —          —          65,890  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment assets

   $ 66,103      $ 80,732      $ 83,925      $ 230,760  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a reconciliation of Level 3 assets for the six months ended June 30, 2018:

 

Level 3

  Beginning
Balance
as of
January 1,
2018
    Transfers
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 June 30,
2018
 

Fixed Income

  $ 83,789     $ (16,237   $ 62,591     $ 1,054     $ (1,948   $ (47,695   $ 536     $ 82,090  

Equity/Other

    136       —         —         —         101       —         —         237  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment assets

  $ 83,925     $ (16,237   $ 62,591     $ 1,054     $ (1,847   $ (47,695   $ 536     $ 82,327  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following is a reconciliation of Level 3 assets for the year ended December 31, 2017:

 

Level 3

  Beginning
Balance
as of
January 1,
2017
    Transfers
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,
2017
 

Fixed Income

  $ 83,979     $ —       $ 139,859     $ 2,053     $ (2,854   $ (142,824   $ 3,576     $ 83,789  

Equity/Other

    501       —         2,137       (321     17       (2,198     —         136  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment assets

  $ 84,480     $ —       $ 141,996     $ 1,732     $ (2,837   $ (145,022   $ 3,576     $ 83,925  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Purchases may include PIK, securities received in corporate actions and restructurings. Sales and Settlements may include securities delivered in corporate actions and restructuring of investments.

(2)  

The net change in unrealized depreciation relating to assets still held at June 30, 2018 totaled $(1,204) consisting of the following: $(1,305) related to fixed income securities and $101 relating to equity/other. The net change in unrealized depreciation relating to assets still held at December 31, 2017 totaled $(3,315) consisting of the following: $(3,332) related to fixed income and $17 related to equity/other.

No securities were transferred into the Level 3 hierarchy and three securities with a fair value of $16,236 were transferred from Level 3 to Level 2 during the six months ended June 30, 2018 as a result of increased pricing transparency. There were no transfers into or out of Level 3 for the year ended December 31, 2017. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.

 

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The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets as of June 30, 2018 and December 31, 2017, respectively. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien/Senior Secured is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 assets.

June 30, 2018

 

Level 3 Instruments

 

 

Level 3 Assets as of June 30, 2018

 

 

Significant Unobservable

Inputs by Valuation

Techniques 1

 

 

Range of Significant Unobservable

Inputs (Weighted Average 3 ) as of

June 30, 2018

 

 

Bank Loans, Corporate Debt, and Other Debt Obligations

 

 

1st Lien/Senior Secured and Unsecured Debt

 

 

Discounted cash flows:

•  Discount Rate

Asset Recovery /Waterfall analysis: 

•  Liquidation Value

•  Uncertainty Discount

 

 

 

7.9% - 40.0% (13.7%)

 

N/A

15%

Equity  

 

Common Stock, LLC Units and Warrants on private stock

 

 

 

Liquidation Value

 

 

N/A

 

Equity

 

 

 

Warrants on publicly traded stock

 

 

 

Volatility

 

 

 

58.76

 

December 31, 2017

 

Level 3 Instruments

 

 

Level 3 Assets as of
December 31, 2017

 

 

Significant Unobservable

Inputs by Valuation

Techniques 1

 

 

Range of Significant Unobservable  

Inputs (Weighted Average 3 ) as of
December 31, 2017

 

 

Bank Loans, Corporate Debt, and Other Debt Obligations

 

 

1st Lien/Senior Secured and Unsecured Debt

 

 

Discounted cash flows:

•  Discount Rate

Comparable multiples:

•  EV/EBITDA 4

Liquidation/Waterfall analysis:

•  EV/EBITDA 4

 

 

 

7.69% - 38.75% (11.30%)

 

4.25 – 13.75 (6.68)

 

Equity

 

 

Common Stock, LLC Units and Warrants on private stock

 

 

 

Liquidation Value

 

 

N/A

 

Equity

 

 

Warrants on publicly traded stock

 

 

 

Volatility

 

 

67.99%

 

(1)  

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(2)  

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(3)  

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

(4)  

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization.

 

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5. DEBT

On November 3, 2016, the Company assumed $33,646 of Full Circle 8.25% Senior Notes due 2020 (the “2020 Notes”) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016. The 2020 Notes had a maturity date of June 30, 2020 and on October 20, 2017 we redeemed them completely at their par value plus accrued and unpaid interest.

On September 13, 2017, we offered $28,375 in aggregate principal amount of 6.50% notes due 2022 (the “GECCL Notes”). On September 29, 2017, we sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise of the underwriters’ over-allotment option.

The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes on January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

On January 11, 2018, we offered $43,000 in aggregate principal amount of 6.75% notes due 2025 (the “GECCM Notes”). On January 19, 2018 and February 9, 2018, we sold an additional $1,898 and $1,500 of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option.

The GECCM Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCM Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCM Notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes will mature on January 31, 2025 and can be called on, or after, January 31, 2021. Holders of the GECCM Notes do not have the option to have the GECCM Notes repaid prior to the stated maturity date. The GECCM Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

As part of the offerings, the Company incurred fees and costs, which are treated as a reduction of the carrying amount of the debt on our Statements of Assets and Liabilities. These deferred financing costs presented as a reduction to the Notes payable balance are being amortized into interest expense over the term of the Notes.

The Investment Company Act limits, with certain exceptions, the 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 June 30, 2018, the Company’s outstanding borrowings were $79,029, and the Company’s asset coverage ratio was 2.55 to 1.

Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following table:

 

Year

  Total Amount
Outstanding (1)
    Asset Coverage
Ratio Per Unit (2)
    Involuntary Liquidation
Preference Per Unit (3)
    Average Market
Value Per Unit (4)
 

December 31, 2016

       

2020 Notes

  $ 33,646     $ 6.17       N/A     $ 1.02  

December 31, 2017

       

GECCL Notes

  $ 32,631     $ 5.01       N/A     $ 1.02  

June 30, 2018

       

GECCL Notes

  $ 32,631     $ 2.55       N/A     $ 1.02  

GECCM Notes

  $ 46,398     $ 2.55       N/A     $ 1.00  

 

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(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 of indebtedness.

(3)  

The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.

(4)  

The average market value per unit for the Notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness for each period.

The indenture’s covenants, include compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the Investment Company Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder. As of June 30, 2018, the Company had not repurchased any of the Notes. As of June 30, 2018 and December 31, 2017 the Company was in compliance with all covenants under the indentures.

For the three and six months ended June 30, 2018 and 2017, the components of interest expense were as follows:

 

     For the three
months ended
June 30, 2018
    For the six
months ended
June 30, 2018
    For the three
months ended
June 30, 2017 (1)
    For the six
months ended
June 30, 2017 (1)
 

Borrowing interest expense

   $ 1,314     $ 2,462     $ 694     $ 1,388  

Amortization of acquisition premium

     142       269       (63     (126
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,456     $ 2,731     $ 631     $ 1,262  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average interest rate (2)

     7.37     7.34     7.61     7.56

Average outstanding balance

   $ 79,029     $ 74,389     $ 33,646     $ 33,646  

 

(1)

For the periods ended June 30, 2017, amounts include the 2020 Notes.

(2)

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.

 

     June 30, 2018  
Facility    Commitments      Borrowings
Outstanding
     Fair
Value
 

Unsecured Debt - GECCL Notes

   $ 32,631      $ 32,631      $ 33,397  

Unsecured Debt - GECCM Notes

     46,398        46,398        46,491  
  

 

 

    

 

 

    

 

 

 

Total

   $ 79,029      $ 79,029      $ 79,888  
  

 

 

    

 

 

    

 

 

 

 

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Index to Financial Statements
     December 31, 2017  
Facility    Commitments      Borrowings
Outstanding
     Fair
Value
 

Unsecured Debt - GECCL Notes

   $ 32,631      $ 32,631      $ 33,218  
  

 

 

    

 

 

    

 

 

 

Total

   $ 32,631      $ 32,631      $ 33,218  
  

 

 

    

 

 

    

 

 

 

6. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of June 30, 2018, the Company had approximately $17,572 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 June 30, 2018 are included in the Company’s Statement of Assets and Liabilities and the corresponding Schedule of Investments. The Company believes that it had sufficient cash and other liquid assets on its balance sheet to satisfy the unfunded commitments.

Two complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al., filed on September 23, 2016 (the “Saunders Action”), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the “Russell Action”), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the “Circuit Court”), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the “Speiser Action”, and together with the Saunders Action and the Russell Action, the “Actions”).

On October 24, 2016, the Company, Full Circle, Great Elm Capital Group, MAST Capital, certain directors of the Full Circle and plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and the Company agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.

7. INDEMNIFICATION

Under the 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.

 

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8. CAPITAL TRANSACTIONS

Issuer Purchases of Equity Securities

During the year ended December 31, 2017, the Company purchased 2,138,479 shares under its tender offer and $15,000 stock buyback program at a weighted average price of $11.20 per share. As of June 30, 2018, the Company had cumulatively purchased 2,236,651 shares under its tender offer and stock buyback program at a weighted average price of $11.18 per share, resulting in $15,000 of cumulative cash paid, under the program since November 4, 2016. Including the tender offer, the Company utilized $25,000 under its stock buyback and tender program for repurchasing shares.

 

Month    Total Number of
Shares Purchased
     Average Price Per
Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Program
     Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
(Amounts in dollars)
 

November 2016

     16,030      $ 10.79        16,030      $ 14,826,985  

December 2016

     82,142      $ 10.72        82,142        13,946,200  
  

 

 

    

 

 

    

 

 

    

Total 2016

     98,172      $ 10.73        98,172     

January 2017

     132,434      $ 11.48        132,434        12,425,611  

February 2017

     72,678      $ 11.26        72,678        11,607,509  

March 2017

     40,617      $ 11.09        40,617        11,157,069  

April 2017

     16,846      $ 11.38        16,846        10,965,351  

May 2017 (1)

     944,535      $ 11.44        944,535        10,158,722  

June 2017

     15,215      $ 10.42        15,215        10,000,182  

July 2017

     47,961      $ 10.73        47,961        9,485,725  

August 2017

     37,666      $ 10.78        37,666        9,079,585  

September 2017

     753,097      $ 11.00        753,097        792,735  

October 2017

     65,945      $ 10.27        65,945        115,277  

November 2017

     11,485      $ 10.04        11,485        —    
  

 

 

    

 

 

    

 

 

    

Total 2017

     2,138,479      $ 11.20        2,138,479     

Total

     2,236,651      $ 11.18        2,236,651      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10,000 tender offer we announced on March 30, 2017 that expired on May 5, 2017.

9. EARNINGS PER SHARE

The following information sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2018 and June 30, 2017:

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2018      2017     2018     2017  

Numerator for basic and diluted earnings per share - increase in net assets resulting from operations

   $ 2,648      $ (2,467   $ (1,391   $ 912  

Denominator for basic and diluted earnings per share - weighted average shares outstanding

     10,652,401        12,000,803       10,652,401       12,316,884  

Basic and diluted earnings per share

   $ 0.25      $ (0.20   $ (0.13   $ 0.07  

Diluted earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the periods presented.

 

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10. FINANCIAL HIGHLIGHTS

Below is the schedule of financial highlights of the Company for the six months ended June 30, 2018 and 2017, respectively:

 

     For the Six Months Ended
June 30,
 
     2018     2017  

Per Share Data: (1)

    

Net asset value, beginning of period

   $ 12.42     $ 13.52  

Net investment income

     0.93       0.61  

Net realized gains

     0.11       0.27  

Net change in unrealized appreciation (depreciation)

     (1.17     (0.81
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     (0.13     0.07  
  

 

 

   

 

 

 

Accretion from share buybacks

     —         0.20  

Distributions declared from net investment income (2)

     (0.50     (0.50
  

 

 

   

 

 

 

Net decrease resulting from distributions to common stockholders

     (0.50     (0.50
  

 

 

   

 

 

 

Net asset value, end of period

   $ 11.79     $ 13.29  
  

 

 

   

 

 

 

Per share market value, end of period

   $ 9.24     $ 10.62  
  

 

 

   

 

 

 

Shares outstanding, end of period

     10,652,401       11,568,555  

Total return based on net asset value (3)

     (1.04 )%      1.98

Total return based on market value (3)

     (1.03 )%      (4.78 )% 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 125,591     $ 153,702  

Ratio of total expenses to average net assets before waiver (4),(5)

     7.38     7.19

Ratio of total expenses to average net assets after waiver (4),(5)

     7.38     7.27

Ratio of incentive fees to average net assets (4)

     (1.85 )%      2.30

Ratio of net investment income to average net assets (4),(5)

     15.55     9.21

Portfolio turnover

     30     64

 

(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 six months ended June 30, 2018 and 2017 average net assets were $128,924 and $165,822, respectively.

(5)  

Annualized for periods less than one year.

11. AFFILIATED AND CONTROLLED INVESTMENTS

Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at June 30, 2018 represented 33% of the Company’s net assets.

Controlled investment as defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at June 30, 2018 represented 16% of the Company’s net assets.

 

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As a result of restructurings during the second quarter of 2018, Avanti Communications Group PLC became an affiliated investment and The Finance Company became a controlled investment. Both investments were previously considered to be non-affiliated, non-controlled investments.

Fair value as of June 30, 2018 along with transactions during the six months ended June 30, 2018 in these affiliated investments and controlled investments was as follows:

 

    For the Six Months Ended June 30, 2018  

Issue (1)

  Fair value at
December 31,
2017
    Gross
Additions (2)
    Gross
Reductions (3)
    Net Realized
Gain (Loss)
    Change in
Unrealized

Appreciation
(Depreciation)
    Fair value
at June 30,
2018
    Interest
Income (4)
    Fee
Income
    Dividend
Income
 

Non-Controlled, Affiliated Investments

                 

OPS Acquisitions Limited and Ocean Protection Services Limited

                 

Term Loan

  $ 1,770     $ —       $ —       $ —       $ (1,736   $ 34     $ —       $ —       $ —    

Equity (19% of class)

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,770       —         —         —         (1,736     34       —         —         —    

Avanti Communications Group PLC

                 

Senior Secured Bond, 2nd Lien

    28,807       2,373       —         —         (2,964     28,216       2,101       87       —    

Senior Secured Bond, 3rd Lien

    13,257       5,626       50,637       —         31,754       —         3,664       3       —    

Equity (9% of class)

    213       50,637       —         —         (37,116     13,734       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    42,277       58,636       50,637       —         (8,326     41,950       5,765       90       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 44,047     $ 58,636     $ 50,637     $ —       $ (10,062   $ 41,984     $ 5,765     $ 90     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Controlled Investments

                 

PE Facility Solutions, LLC

                 

Revolver

  $ —       $ 33,845     $ 30,166     $ —       $ —       $ 3,679     $ 90     $ 22     $ —    

Term Loan A

    9,900       —         —         —         —         9,900       636       —         —    

Term Loan B

    8,204       507       3,407       210       (327     5,187       621       —         —    

Equity (83% of class)

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    18,104       34,352       33,573       210       (327     18,766       1,347       22       —    

The Finance Company

 

           

Senior Secured Bond

    1,993       —         2,191       —         198       —         181       1       —    

Revolver

    —         900       365       —         —         535       5       3       —    

Term Loan B

    —         1,491       —         —         (383     1,108       12       —         —    

Equity (72% of class)

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,993       2,391       2,556       —         (185     1,643       198       4       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 20,097     $ 36,743     $ 36,129     $ 210     $ (512   $ 20,409     $ 1,545     $ 26     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 interest, accretion of discounts and the exchange of one or more existing securities for one or more new securities.

 

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Index to Financial Statements
(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)  

Interest income includes accrued PIK interest.

In accordance with SEC Regulation S-X Rules 3-09 and 4-08(g), the Company must determine which of its unconsolidated controlled portfolio companies, if any, are considered to be “significant subsidiaries.” After performing this analysis, the Company determined that one portfolio company, PE Facility Solutions, LLC (“PEFS”), is a significant subsidiary for the six months ended June 30, 2018 under at least one of the significance conditions of Rule 4-08(g). Accordingly, unaudited financial information for the six months ended June 30, 2018 has been included as follows (in thousands):

 

Balance Sheet

   As of June 30, 2018  

Current assets

   $ 9,504  

Noncurrent assets

     11,932  
  

 

 

 

Total Assets

     21,436  

Current liabilities

     7,594  

Noncurrent liabilities

     20,704  
  

 

 

 

Total Liabilities

     28,298  

Net Equity

   $ (6,862

Statement of Operations

   For the Six Months Ended June 30, 2018  

Gross Revenues

   $ 29,833  

Cost of Sales

     (24,321

SG&A Expenses

     (4,181
  

 

 

 

EBITDA

   $ 1,331  

Net Loss from Continuing Operations

   $ (1,170

12. SUBSEQUENT EVENTS

In July 2018, we purchased an additional $2,000 of par value of Commercial Barge Line Company first lien term loan at a price of approximately 72% of par value.

In July 2018, we purchased $478 of par value of PFS Holdings Corp. first lien term loan at a price of approximately 60% of par value.

In July 2018, we purchased an additional $2,500 of par value of Sungard Availability Services Capital, Inc. first lien senior secured term loan at a price of approximately 99% of par value.

In July 2018, we exercised all of our RiceBran Technologies Corporation warrants at a price of $1.60 per share in a cashless exercise. This transaction resulted in GECC receiving 139,392 shares. We subsequently sold all of the shares at a weighted average price of $2.43 per share.

In July 2018, in connection with the sale of one of its businesses, DataX, Ltd., The Selling Source, LLC paid down $3,800 of our outstanding $5,689 first lien, senior secured holding. The remainder of the investment was restructured, with GECC receiving $1,250 of first out term loan bearing interest at a rate of 3-month LIBOR plus 5%, which matures on January 13, 2020.

In August 2018, we purchased an additional $2,647 of par value of SESAC Holdco II LLC second lien senior secured loan at a price of approximately 99% of par value.

 

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In August 2018, we purchased $2,000 of par value of California Pizza Kitchen, Inc. first lien term loan at a price of approximately 98% of par value.

In August 2018, we sold our position in Foresight Energy LP at a price of approximately 100% of par value.

Our Board declared the monthly distributions for the fourth quarter of 2018 at an annual rate of approximately 8.4% of our June 30, 2018 NAV, which equates to $0.083 per month. The schedule of distribution payments is as follows:

 

Month

   Rate      Record Date    Payable Date

October

   $ 0.083      October 31, 2018    November 15, 2018

November

   $ 0.083      November 30, 2018    December 14, 2018

December

   $ 0.083      December 31, 2018    January 15, 2019

 

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Index to Financial Statements

Report of Independent Regist ered Public Accounting Firm

To the Shareholders and Board of Directors of

Great Elm Capital Corp.

Waltham, Massachusetts

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying consolidated statement of assets and liabilities of Great Elm Capital Corp. (the “Company”), including the schedules of investments, as of December 31, 2017 and 2016, and the related consolidated statement of operations, changes in net assets, cash flows, and financial highlights (presented in Note 11) for the period from inception (April 22, 2016) to December 31, 2016 and for the year ended December 31, 2017, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations, changes in nets assets, cash flows, and financial highlights (presented in Note 11) for the period from inception (April 22, 2016) to December 31, 2016 and the year ended December 31, 2017, in conformity with principles generally accepted in the United States of America.

Basis for Opinion

These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2017 and 2016, by correspondence with the custodian, loan agents, and borrowers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Deloitte & Touche LLP
McLean, Virginia
March 12, 2018
We have served as the Company’s auditor since 2016.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

Dollar amounts in thousands (except per share amounts)

 

    December 31, 2017     December 31, 2016  

Assets

   

Non-affiliated, non-controlled investments, at fair value (amortized cost of $179,558 and $163,809, respectively)

  $ 144,996     $ 150,323  

Non-affiliated, non-controlled short term investments, at fair value (amortized cost of $65,892 and $0, respectively)

    65,890       —    

Affiliated investments, at fair value (amortized cost of $4,240 and $4,255, respectively)

    1,770       4,286  

Controlled investments, at fair value (amortized cost of $18,487 and $68, respectively)

    18,104       68  
 

 

 

   

 

 

 

Total investments

    230,760       154,677  
 

 

 

   

 

 

 

Cash and cash equivalents

    2,916       66,782  

Receivable for investments sold

    12       9,406  

Interest receivable

    5,027       4,338  

Principal receivable

    —         786  

Due from portfolio company

    204       312  

Deposit at broker

    —         56  

Due from affiliates

    692       80  

Prepaid expenses and other assets

    302       107  
 

 

 

   

 

 

 

Total assets

  $ 239,913     $ 236,544  
 

 

 

   

 

 

 

Liabilities

   

Notes payable 8.25% due June 30, 2020 (including unamortized premium of $0 and $888 at December 31, 2017 and December 31, 2016, respectively)

  $ —       $ 34,534  

Notes payable 6.50% due September 18, 2022 (including unamortized discount of $1,435 and $0 at December 31, 2017 and December 31, 2016, respectively)

    31,196       —    

Payable for investments purchased

    66,165       21,817  

Interest payable

    354       —    

Distributions payable

    3,015       2,123  

Due to affiliates

    6,193       3,423  

Accrued expenses and other liabilities

    703       1,663  
 

 

 

   

 

 

 

Total liabilities

  $ 107,626     $ 63,560  
 

 

 

   

 

 

 

Commitments and contingencies (Note 6)

  $ —       $ —    

Net Assets

   

Common stock, par value $0.01 per share (100,000,000 shares authorized, 10,652,401 and 12,790,880 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively)

  $ 107     $ 128  

Additional paid-in capital

    198,426       219,317  

Accumulated net realized losses

    (33,328     (34,341

Undistributed net investment income

    4,499       1,335  

Net unrealized depreciation on investments

    (37,417     (13,455
 

 

 

   

 

 

 

Total net assets

  $ 132,287     $ 172,984  
 

 

 

   

 

 

 

Total liabilities and net assets

  $ 239,913     $ 236,544  
 

 

 

   

 

 

 

Net asset value per share

  $ 12.42     $ 13.52  
 

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

Dollar amounts in thousands (except per share amounts)

 

    For the Year
Ended
December 31,
2017
    For the
Period Ended
December 31,
2016
 

Investment Income:

   

Interest income from:

   

Non-affiliated, non-controlled investments

  $ 15,830     $ 5,211  

Non-affiliated, non-controlled investments (PIK)

    10,719       —    

Affiliated investments

    73       102  

Controlled investments

    1,312       —    

Controlled investments (PIK)

    990       —    
 

 

 

   

 

 

 

Total interest income

    28,924       5,313  
 

 

 

   

 

 

 

Dividend income from non-affiliated, non-controlled investments

    298       —    

Other income from:

   

Non-affiliated, non-controlled investments

    470       518  

Controlled investments

    36       —    
 

 

 

   

 

 

 

Total other income

    506       518  
 

 

 

   

 

 

 

Total investment income

    29,728       5,831  
 

 

 

   

 

 

 

Expenses:

   

Management fees

    2,298       392  

Incentive fees

    4,394       863  

Administration fees

    1,362       224  

Custody fees

    62       10  

Directors’ fees

    136       38  

Professional services

    1,013       186  

Professional services related to the Merger and Formation transactions

    —         3,471  

Interest expense

    2,039       420  

Other expenses

    655       214  
 

 

 

   

 

 

 

Total expenses

    11,959       5,818  

Accrued administration fee waiver

    (70     80  
 

 

 

   

 

 

 

Net expenses

    12,029       5,738  
 

 

 

   

 

 

 

Net investment income before taxes

    17,699       93  
 

 

 

   

 

 

 

Excise tax

    124       88  
 

 

 

   

 

 

 

Net investment income

    17,575       5  
 

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investment transactions:

   

Net realized gain (loss) from:

   

Non-affiliated, non-controlled investments

    3,641       274  

Affiliated investments

    —         —    

Controlled investments

    (8     —    

Purchase accounting

    —         (4,698
 

 

 

   

 

 

 

Total net realized gain (loss)

    3,633       (4,424
 

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) from:

   

Non-affiliated, non-controlled investments

    (21,078     (13,487

Affiliated investments

    (2,501     32  

Controlled investments

    (383     —    
 

 

 

   

 

 

 

Total net change in unrealized appreciation (depreciation)

    (23,962     (13,455
 

 

 

   

 

 

 

Net realized and unrealized gains (losses)

    (20,329     (17,879
 

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ (2,754   $ (17,874
 

 

 

   

 

 

 

Net investment income per share (basic and diluted):

  $ 1.52     $ —   (1)    

Earnings per share (basic and diluted):

  $ (0.24   $ (1.39

Weighted average shares outstanding:

    11,655,370       12,852,758  

 

(1)

Rounds to less than 0.005

The accompanying notes are an integral part of these financial statements.

 

F-37


Table of Contents
Index to Financial Statements

GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

Dollar amounts in thousands

 

     For the Year
Ended
December 31,
2017
    For the Period
Ended
December 31,

2016
 

Increase (decrease) in net assets resulting from operations:

    

Net investment income

   $ 17,575     $ 5  

Net realized gain (loss) on investments

     3,633       274  

Purchase accounting loss

     —         (4,698

Net change in unrealized appreciation (depreciation) on investments

     (23,962     (13,455
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (2,754     (17,874
  

 

 

   

 

 

 

Distributions to stockholders from:

    

Net investment income

     (13,682     (2,123
  

 

 

   

 

 

 

Total distributions to stockholders

     (13,682     (2,123
  

 

 

   

 

 

 

Capital transactions:

    

Cash contribution

     —         30,000  

Acquired assets in the formation transaction

     —         90,494  

Acquired assets in the merger

     —         73,541  

Purchases of common stock

     (24,261     (1,054
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     (24,261     192,981  
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     (40,697     172,984  
  

 

 

   

 

 

 

Net assets at beginning of period

   $ 172,984     $ —    
  

 

 

   

 

 

 

Net assets at end of period

   $ 132,287     $ 172,984  
  

 

 

   

 

 

 

Undistributed net investment income

   $ 4,499     $ 1,335  

Capital share activity

    

Shares outstanding at the beginning of the period

     12,790,880       —    

Shares issued – cash contributions

     —         1,966,667  

Shares issued – formation transaction

     —         5,935,800  

Shares issued – merger

     —         4,986,585  

Shares purchased

     (2,138,479     (98,172
  

 

 

   

 

 

 

Shares outstanding at the end of the period

     10,652,401       12,790,880  

The accompanying notes are an integral part of these financial statements.

 

F-38


Table of Contents
Index to Financial Statements

GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollar amounts in thousands

 

     For the Year
Ended
December 31,
2017
    For the Period Ended
December  31,

2016
 

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ (2,754   $ (17,874

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities:

    

Purchases of investments

     (188,168     (42,516

Increase (decrease) in payable for investments purchased

     44,348       21,817  

Net change in short-term investments

     (65,892     —    

Payment-in-kind income

     (11,709     510  

Proceeds from sales of investments

     54,332       10,640  

(Increase) decrease in receivable for investments sold

     9,394       (9,406

Proceeds from principal payments

     120,652       31,098  

Net realized (gain) loss on investments

     (3,633     (274

Purchase Accounting Loss

     —         4,698  

Net change in unrealized (appreciation) depreciation on investments

     23,962       13,455  

Amortization of premium and accretion of discount, net

     (5,627     (2,438

Amortization of discount (premium) on long term debt

     (804     (40

Increase (decrease) in operating assets and liabilities:

    

(Increase) decrease in principal receivable

     786       434  

(Increase) decrease in interest receivable

     (689     (1,342

(Increase) decrease in deposit at broker

     56       (56

(Increase) decrease in due from portfolio company

     108       (224

(Increase) decrease in due from affiliates

     (612     (80

(Increase) decrease in prepaid expenses and other assets

     (195     174  

Increase (decrease) in interest payable

     354       77  

Increase (decrease) in due to affiliates

     2,770       890  

Increase (decrease) in accrued expenses and other liabilities

     (960     (816
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (24,281     8,727  
  

 

 

   

 

 

 

Cash flows from financing activities

    

Cash contributions

     —         59,109  

Purchases of common stock

     (24,261     (1,054

Repayment of 2020 Notes payable

     (33,645     —    

Issuance of GECCL Notes payable

     31,111       —    

Distributions paid

     (12,790     —    
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (39,585     58,055  
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (63,866     66,782  

Cash, beginning of period

     66,782       —    
  

 

 

   

 

 

 

Cash, end of period

   $ 2,916     $ 66,782  
  

 

 

   

 

 

 

Supplemental disclosure of non-cash financing activities :

    

Assets purchased for shares

   $ —       $ 169,738  

Long term debt assumed in the merger

   $ —       $ 34,574  

Short term debt assumed in the merger

   $ —       $ 2,558  

Short term debt assumed in the formation

   $ —       $ 2,377  

Dividends declared, not yet paid

   $ 3,015     $ 2,123  

Supplemental disclosure of cash flow information:

    

Cash paid for excise tax

   $ 88     $ 0  

Cash paid for interest

   $ 2,489     $ 460  

The accompanying notes are an integral part of these financial statements.

 

F-39


Table of Contents
Index to Financial Statements

GREAT ELM CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2017

Dollar amounts in thousands

 

Portfolio Company

  Security   Industry  

Interest (2)

  Maturity   Par
Amount/
Quantity
    Cost     Fair
Value
    % of
NAV
 

Investments at Fair Value -  174.43% of Net Assets (1)

               

Controlled Investments - 13.68% of Net Assets (3)

               

PE Facility Solutions, LLC

  1st Lien, Senior Secured

Revolver (5,15)

  Building Cleaning
and Maintenance

Services

  11.38% (L + 10.00%) (6)   02/27/2022     —       $ —       $ —         —    

San Diego, CA

  1st Lien, Senior
Secured Revolver -
Unfunded (5,15)
    11.38% (L + 10.00%) (6)   02/27/2022     3,000       —         —         —    
  1st Lien, Senior Secured
Loan A (5,15)
    12.38% (L + 11.00%) (6)   02/27/2022     9,900       9,900       9,900       7.48
  1st Lien, Senior Secured
Loan B (5,15)
    15.38% (L + 14.00%) (6,7)   02/27/2022     9,105       8,587       8,204       6.20
  Common Equity (5,8,15)           1       —         —         —  
           

 

 

   

 

 

   

 

 

 
              18,487       18,104       13.68
           

 

 

   

 

 

   

 

 

 

Total Controlled Investments

              18,487       18,104       13.68
           

 

 

   

 

 

   

 

 

 

Affiliate Investments - 1.34% of Net Assets (4)

               

OPS Acquisitions Limited and Ocean Protection Services Limited

  1st Lien, Senior Secured
Loan (5,10,16)
  Maritime Security

Services

  16.38% (L + 12.00%, 12.50% Floor) (6,7,9)   06/01/2018     4,903       4,240       1,770       1.34

London, UK

  Common Equity (5,8,10,16)           19       —         —         —  
           

 

 

   

 

 

   

 

 

 
              4,240       1,770       1.34
           

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

              4,240       1,770       1.34
           

 

 

   

 

 

   

 

 

 

Non-Control, Non-Affiliate Investments - 109.60% of Net Assets

               

Almonde, Inc.

  2nd Lien, Senior Secured
Loan (5,10,17)
  Software Services   8.94% (L + 7.25%, 8.25% floor) (13)   06/13/2025     5,000       5,037       5,005       3.78

Philadelphia, PA

               

Avanti Communications Group PLC

  2nd Lien, Senior Secured
Bond (10,11)
  Wireless

Telecommunications
Services

  12.50%   10/01/2021     34,917       30,427       28,807       21.78

London, UK

  3rd Lien, Senior Secured
Bond (10,11)
    14.50% (20.00% if PIK election is made) (7)   10/01/2023     54,113       45,011       13,257       10.02
  Common Equity (8,10)           1,829,496       23       213       0.16
           

 

 

   

 

 

   

 

 

 
              75,461       42,277       31.96
           

 

 

   

 

 

   

 

 

 

Commercial Barge Line Company

  1st Lien, Senior Secured
Loan (5,18)
  Water Transport   10.32% (L + 8.75%, 9.75% Floor) (6)   11/12/2020     9,254       7,551       5,279       3.99

Jeffersonville, IN

               

Davidzon Radio, Inc.

  1st Lien, Senior Secured
Loan (5,16)
  Radio Broadcasting   14.38% (L + 10.00%, 11.00% Floor) (6,14)   03/31/2020     9,685       9,144       8,876       6.71

Brooklyn, NY

               

Geo Specialty Chemicals, Inc.

  1st Lien, Senior Secured
Revolver (5,19)
  Chemicals   6.28% (L + 4.75%, 5.75% Floor) (6)   04/30/2019     3,646       3,465       3,500       2.64

Lafayette, Indiana

  1st Lien, Senior Secured
Revolver - Unfunded (5,19)
    6.28% (L + 4.75%, 5.75% Floor) (6)   04/30/2019     729       (29     (29     (0.02 )% 

 

F-40


Table of Contents
Index to Financial Statements

Portfolio Company

  Security     Industry    

Interest (2)

  Maturity     Par
Amount/
Quantity
    Cost     Fair
Value
    % of
NAV
 
   
1st Lien, Senior Secured
Loan (5,19)
 
 
    6.28% (L + 4.75%, 5.75% Floor) (6)     04/30/2019       6,563       6,248       6,300       4.76
           

 

 

   

 

 

   

 

 

 
              9,684       9,771       7.38
           

 

 

   

 

 

   

 

 

 

International Wire Group Inc

   
2nd Lien, Senior Secured
Bond (11)
 
 
    Manufacturing     10.75%     08/01/2021       13,000       12,071       11,960       9.04

Camden, NY

               

Luling Lodging, LLC

   
1st Lien, Senior Secured
Loan (5,16)
 
 
 

 

Hotel Operator

 

  18.38% (L + 12.00%, 12.25% Floor) (6,9,12)     12/18/2017       2,715       1,300       1,605       1.21

Luling, TX

               

Michael Baker International, LLC

   
2nd Lien, Senior Secured
Bond (11)
 
 
   
Industrial
Conglomerates
 
 
  8.75%     03/01/2023       5,000       4,876       4,838       3.66

Pittsburgh, PA

               

NANA Development Corp.

   
1st Lien, Senior Secured
Bond (11)
 
 
    Industrial Other     9.50%     03/15/2019       7,000       6,902       7,070       5.34

Anchorage, AK

               

PEAKS Trust 2009-1

   
1st Lien, Senior Secured
Loan (5,10,16)
 
 
    Consumer Finance     7.50% (L + 5.50%, 7.50% Floor) (6)     01/27/2020       1,462       1,020       878       0.67

Carmel, IN

               

PR Wireless, Inc.

   
1st Lien, Senior Secured
Loan (5,16)
 
 
   
Wireless
Communications
 
 
  6.94% (L + 5.25%) (13)     06/29/2020       9,754       8,908       9,749       7.37

Guaynabo, PR

   
1st Lien, Senior Secured
Delayed Draw Loan (5,20)
 
    8.75% (Prime Rate + 4.25%) (13)     06/29/2020       274       274       274       0.21
   

1st Lien, Senior Secured
Unfunded Delayed Draw
Loan (5,20)
 
 
 
    8.75% (Prime Rate + 4.25%) (13)     06/29/2020       1,098       —         —      
           

 

 

   

 

 

   

 

 

 
              9,182       10,023       7.58
           

 

 

   

 

 

   

 

 

 

RiceBran Technologies Corporation

    Warrants (5,8,16)       Grain Mill Products     $1.60 Strike Price     05/12/2020       300,000       145       136       0.10

Scottsdale, AZ

               

SESAC Holdco II LLC

   
2nd Lien, Senior Secured
Loan (5,21)
 
 
    Business Services     8.94% (L+ 7.25%) (13)     02/24/2025       4,150       4,103       4,156       3.14

Nashville, TN

               

Sungard Availability Services Capital, Inc.

   
1st Lien, Senior Secured
Loan (5,22)
 
 
    Technology Services     11.69% (L+10.00%) (13)     10/01/2022       6,000       5,700       5,952       4.50

Wayne, PA

               

Tallage Lincoln, LLC.

   
1st Lien, Senior Secured
Loan (5,16)
 
 
    Real Estate Services     11.69% (L + 10.00%, 11.00% Floor) (13)     12/31/2019       5,723       5,725       5,718       4.32

Boston, MA

   

1st Lien,
Senior Secured Loan -
Unfunded (5,16)
 
 
 
    11.69% (L + 10.00%, 11.00% Floor) (13)     12/31/2019       2,250       —         —         —    
           

 

 

   

 

 

   

 

 

 
              5,725       5,718       4.32
           

 

 

   

 

 

   

 

 

 

The Finance Company

   
1st Lien, Senior Secured
Loan (5,16)
 
 
    Consumer Finance     17.88% (L + 13.50%, 14.00% Floor) (6,12)     03/31/2018       2,191       2,191       1,993       1.51

Silver Springs, MD

   

1st Lien,
Senior Secured Unfunded
Loan (5,16)
 
 
 
    17.88% (L + 13.50%, 14.00% Floor) (6,12)     03/31/2018       709       —         —         —    
           

 

 

   

 

 

   

 

 

 
              2,191       1,993       1.51
           

 

 

   

 

 

   

 

 

 

The Selling Source, LLC

   
1st Lien, Senior Secured
Loan (5,16,23)
 
 
   
Information and
Data Services
 
 
  17.00% (9.00% PIK, 8.00% Cash) (7,9)     12/31/2017       5,689       4,202       4,659       3.52

Las Vegas, NV

               

Tru Taj, LLC

   
1st Lien, Senior Secured
Bond (11)
 
 
    Retail     12.00%     08/15/2021       16,000       15,264       14,800       11.19

Wayne, NJ

               
           

 

 

   

 

 

   

 

 

 

Total Non-Control, Non- Affiliate Investments

              179,558       144,996       109.60
           

 

 

   

 

 

   

 

 

 

 

F-41


Table of Contents
Index to Financial Statements

Portfolio Company

  Security     Industry    

Interest (2)

  Maturity     Par
Amount/
Quantity
    Cost     Fair
Value
    % of
NAV
 

Short-Term Investments - 49.81% of Net Assets

               

State Street Institutional Treasury Money Market Fund

   
Money Market Mutual
Fund
 
 
          16,052,817       16,053       16,053       12.13

United States Treasury

    Treasury Bill           3/29/2018       50,000       49,839       49,837       37.67
           

 

 

   

 

 

   

 

 

 

Total Short-Term Investments

              65,892       65,890       49.80
           

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS (14) – 174.43% of Net Assets

            $ 268,177     $ 230,760       174.43
           

 

 

   

 

 

   

Other Liabilities in Excess of Assets - (74.43)% of Net Assets

              $ (98,473     (74.43 )% 

NET ASSETS

              $ 132,287       100.00
             

 

 

   

 

 

 

 

(1)

The 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 LIBOR (‘‘London Interbank Offered Rate’’) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of December 31, 2017. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(3)  

‘‘Controlled Investments’’ are investments in those companies that are ‘‘Controlled Investments’’ of the Company, as defined in the Investment Company Act. A company is deemed to be a ‘‘Controlled Investment’’ of the Company if the Company owns more than 25% of the voting securities of such company.

(4)  

‘‘Affiliate Investments’’ are investments in those companies that are ‘‘Affiliated Companies’’ of the Company, a defined in the Investment Company Act, which are not ‘‘Controlled Investments.’’ A company is deemed to be an ‘‘Affiliate’’ of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.

(5)  

Investments classified as Level 3 whereby fair value was determined by the Company’s board of directors.

(6)  

The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2017 was 1.56%.

(7)  

Security pays, or has the option to pay, all of its interest in kind.

(8)  

Non-income producing security.

(9)  

Investment was on non-accrual status as of December 31, 2017.

(10 )  

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 20.82% were non-qualifying assets as of December 31, 2017.

(11)  

Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.

(12)  

The interest rate on these loans includes a default interest rate.

(13)  

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2017 was 1.69%.

(14)  

As of December 31, 2017, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,353; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $25,103; the net unrealized depreciation was $22,750; the aggregate cost of securities for Federal income tax purposes was $253,510.

(15)  

Restricted security initially obtained on February 28, 2017.

(16)  

Restricted security initially obtained on November 3, 2016.

(17)  

Restricted security initially obtained on December 14, 2017.

(18)  

Restricted security initially obtained on May 17, 2017.

(19)  

Restricted security initially obtained on September 28, 2017.

(20)  

Restricted security initially obtained on November 15, 2017.

(21)  

Restricted security initially obtained on December 13, 2017.

(22)  

Restricted security initially obtained on December 20, 2017.

(23)  

Loan defaulted on January 1, 2018.

L = LIBOR

 

F-42


Table of Contents
Index to Financial Statements

As of December 31, 2017, the Company’s investments consisted of the following:

 

     December 31, 2017  

Investment Type

   Cost      Fair Value  

1st Lien/Senior Secured Debt

   $ 202,117      $ 164,521  

Equity/Other

     168        349  
  

 

 

    

 

 

 

Total Long Term Investments

   $ 202,285      $ 164,870  
  

 

 

    

 

 

 

As of December 31, 2017, the industry composition of the Company’s portfolio at fair value was as follows:

 

     December 31, 2017  
     Investments at Fair
Value
     Percentage of  Total
Investment
Portfolio
 

Wireless Telecommunications Services

   $ 42,277        25.6

Building Cleaning and Maintenance Services

     18,104        11.0

Retail

     14,800        9.0

Manufacturing

     11,960        7.3

Wireless Communications

     10,023        6.1

Chemicals

     9,771        5.9

Radio Broadcasting

     8,876        5.4

Industrial Other

     7,070        4.3

Technology Services

     5,952        3.6

Real Estate Services

     5,718        3.5

Water Transport

     5,279        3.2

Software Services

     5,005        3.0

Industrial Conglomerates

     4,838        2.9

Information and Data Services

     4,659        2.8

Business Services

     4,156        2.5

Consumer Finance

     2,871        1.7

Maritime Security Services

     1,770        1.1

Hotel Operator

     1,605        1.0

Grain Mill Products

     136        0.1
  

 

 

    

 

 

 

Total

   $ 164,870        100.0
  

 

 

    

 

 

 

As of December 31, 2017, the geographic composition of the Company’s portfolio at fair value was as follows:

 

Geographic

   December 31, 2017  

United States

     73.3

United Kingdom

     26.7
  

 

 

 

Total percentage of net assets

     100.0
  

 

 

 

 

F-43


Table of Contents
Index to Financial Statements

GREAT ELM CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

Dollar amounts in thousands

 

Portfolio Company

  Industry     Interest    

Maturity

  Par Amount/
Quantity
    Cost     Fair
Value
    % of
NAV
 

Investments at Fair Value - 89.42% (1)

             

Corporate Debt - 89.13% (2)

             

1st Lien/Senior Secured Debt - 82.10%

             

310E53RD, LLC (3)(4)

   
Real Estate Holding
Company
 
 
   

10.77% (L + 10.00,
10.15% Floor,

16.00% Cap)

 
 

 

  07/01/2017   $ 6,000       5,982     $ 5,982       3.46

Ads Direct Media, Inc. (3)(4)(5)

    Internet Advertising      
16.50% (L + 13.00%,
16.50% Floor)
 
 
  05/02/2018     2,035       745       830       0.48

Avanti Communications Group PLC (6)(7)(8)(9)

   

Wireless
Telecommunications
Services
 
 
 
    10.00%     10/01/2019     70,035       55,298       42,021       24.29

Chester Downs & Marina LLC / Chester Downs Finance Corp. (6)

   
Casinos and
Gaming
 
 
    9.25%     02/01/2020     6,000       5,801       5,760       3.33

Davidzon Radio, Inc. (3)(4)

    Radio Broadcasting      
11.00% (L + 10.00%,
11.00% Floor)
 
 
  03/31/2020     10,127       9,358       9,297       5.37

JN Medical Corporation (3)(4)(5)(10)

    Biological Products      

16.77% (L + 16.00%,
11.25% Floor,

17.00% Cap)

 

 

  06/30/2016     3,500       1,750       1,656       0.96

Luling Lodging, LLC (3)(4)(5)

    Hotel Operator      
17.77% (L + 17.00%,
12.25% Floor)
 
 
  12/18/2017     4,500       3,578       3,578       2.07

OPS Acquisitions Limited and Ocean Protection Services Limited (3)(4)(7)(13)

   
Maritime Security
Services
 
 
   
12.77% (L + 12.00%,
12.50% Floor)
 
 
  06/01/2018     4,371       4,255       4,286       2.48

Optima Specialty Steel, Inc. (3)(6)(14)

    Metals and Mining       12.50%     12/15/2016     15,100       15,100       13,854       8.01

PEAKS Trust 2009-1 (3)(4)(7)

    Consumer Financing      
7.50% (L + 5.00%,
7.50% Floor)
 
 
  01/27/2020     1,862       1,092       1,072       0.62

PR Wireless, Inc. (3)(14)

   
Wireless
Communications
 
 
   
10.00% (L + 9.00%,
10.00% Floor)
 
 
  06/27/2020     8,288       7,524       7,645       4.42

Pristine Environments, Inc., Revolver (3)(4)(11)

   

Building Cleaning
and Maintenance
Services
 
 
 
   
15.27% (L + 14.50%,
11.70% Floor)
 
 
  03/31/2017     8,129       8,129       8,129       4.70

Pristine Environments, Inc., Term Loan A (3)(4)(11)

   

Building Cleaning
and Maintenance
Services
 
 
 
   
16.27% (L + 15.50%,
12.70% Floor)
 
 
  03/31/2017     1,630       1,630       1,630       0.94

Pristine Environments, Inc., Term Loan B (3)(4)(11)

   

Building Cleaning
and Maintenance
Services
 
 
 
   
16.27% (L + 15.50%,
12.70% Floor)
 
 
  03/31/2017     3,004       3,004       2,807       1.62

RiceBran Technologies Corporation (3)(4)

    Grain Mill Products      

11.52% (L + 10.75%,
11.50% Floor,

12.00% cap)

 
 

 

  06/01/2018     1,384       1,384       1,362       0.79

RiceBran Technologies Corporation (3)(4)

    Grain Mill Products      

11.52% (L + 10.75%,
11.50% Floor,

12.00% cap)

 
 

 

  06/01/2018     1,375       1,362       1,366       0.79

Sonifi Solutions, Inc. (3)(8)

   
Consumer
Discretionary
 
 
    8.00%     03/28/2018     11,577       5,933       6,715       3.88

Tallage Adams, LLC (3)(15)

    Real Estate Services      
11.00% (L + 10.00%,
11.00% Floor)
 
 
  12/31/2017     1,505       1,507       1,504       0.87

Tallage Lincoln, LLC. (3)(15)

    Real Estate Services      
11.00% (L + 10.00%,
11.00% Floor)
 
 
  12/31/2019     5,423       5,430       5,415       3.13

The Finance Company (3)(4)

    Consumer Finance      
14.02% (L + 13.25%,
13.75% Floor)
 
 
  03/31/2018     2,697       2,697       2,650       1.53

The Selling Source, LLC (3)(5)(8)

   
Information and
Data Services
 
 
    17.00%     12/31/2017     5,155       4,444       4,201       2.43

Trilogy International Partners (6)

   

Wireless
Telecommunications
Services
 
 
 
    13.38%     05/15/2019     10,000       10,005       10,250       5.93

Total 1st Lien/Senior Secured Debt

            156,008       142,010       82.10
         

 

 

   

 

 

   

 

 

 

Unsecured Debt - 7.03%

             

Everi Payments, Inc.

    Hardware       10.00%     01/15/2022     12,289       11,598       12,166       7.03

 

F-44


Table of Contents
Index to Financial Statements

Portfolio Company

  Industry     Interest    

Maturity

  Par Amount/
Quantity
    Cost     Fair
Value
    % of
NAV
 

Modular Process Control, LLC (3)(5)(12)

   
Energy Efficiency
Services
 
 
    5.00%     04/01/2025     800       —         —         —  
   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total Unsecured Debt

            11,598       12,166       7.03

Equity/Other - 0.29%

             

Infinite Aegis Group, LLC, Warrants (3)(12)

   
Healthcare Billing
and Collections
 
 
    08/01/2023     1       —         —         —  

OPS Acquisitions Limited and Ocean Protection Services Limited, Common Stock (3) (7) (12)

   
Maritime Security
Services
 
 
        19       —         —         —  

PR Wireless, Inc., Warrants (3)(12)

   
Wireless
Communications
 
 
    06/27/2024     101       313       314       0.18

RiceBran Technologies Corporation,
Warrants (3)(12)

    Grain Mill Products       05/12/2020     300,000       145       119       0.07

Texas Westchester Financial, LLC, Limited Liability Company Interests (3)(12)(16)

    Consumer Financing           9,278       68       68       0.04
         

 

 

   

 

 

   

 

 

 

Total Equity/Other

            526       501       0.29
         

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS – 89.42%

          $ 168,132       154,677       89.42
         

 

 

   

 

 

   

 

 

 

Other Assets in Excess of Liabilities - 10.58%

            $ 18,307       10.58

NET ASSETS - 100.00%

            $ 172,984       100.00
           

 

 

   

 

 

 

 

(1)

The 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 LIBOR (‘‘London Interbank Offered Rate’’) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of December 31, 2016. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(3)

Investments classified as Level 3 whereby fair value was determined by the Company’s board of directors.

(4)

The interest rate on these loans is subject to the greater of a LIBOR floor or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2016 was 0.77%.

(5)

Investment was on non-accrual status as of December 31, 2016.

(6)

Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.

(7)

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 20.0% are non-qualifying assets.

(8)

Security pays all or a portion of its interest in kind.

(9)

On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to permit, among other things, the incurrence of up to $132,500 in super senior indebtedness (the “PIK Toggle Notes”) and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes, (2) the New Money Offer and (3) offer to holders participating in the New Money Offer to exchange a portion of their Existing Notes for additional PIK Toggle Notes. Holders who elected to backstop the New Money Offer also received their pro rata share of additional common equity issued by Avanti in an aggregate amount equal to 9.09% of Avanti’s total outstanding shares. Through completion of the consent solicitation and the New Money Offer, Avanti received $80,000 of new cash funding, with an additional $50,000 of funding available on a delayed draw basis, and will have the ability to defer up to $112,000 of future interest payments through April 2018. The Company took part in the refinancing, exchanging $22,900 of Existing Notes for new PIK Toggle Notes and purchasing an additional $9,200 of PIK Toggle Notes for $8,900 of funded cash. The Company continues to hold $47,200 of the Existing Notes.

(10)

In February 2017, the Company sold its loan to JNI Medical Corporation for total consideration, including payment for expenses due under the loan agreement of $3,000. The Company recognized approximately $1,000 of realized gain on the sale.

(11)

In February 2016, the Pristine Environments, Inc. loans were refinanced at par plus accrued interest and fees, less approximately $500 of remaining principal on the Term Loan B.

(12)

Non-income producing security.

(13)

‘‘Affiliate Investments’’ are investments in those companies that are ‘‘Affiliated Companies’’ of the Company, a defined in the Investment Company Act, which are not ‘‘Control Investments.’’ A company is deemed to be an ‘‘Affiliate’’ of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.

(14)

In March 2017, the Optima Specialty Steel, Inc. note was refinanced at par plus accrued interest and fees.

(15)

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2016 was 1.00%.

(16)

‘‘Control Investments’’ are investments in those companies that are ‘‘Control Investments’’ of the Company, as defined in the Investment Company Act. A company is deemed to be a ‘‘Control Investment’’ of the Company if the Company owns more than 25% of the voting securities of such company.

L = LIBOR

 

F-45


Table of Contents
Index to Financial Statements

As of December 31, 2016, the Company’s investments consisted of the following:

 

     Period Ended
December 31, 2016
 

Investment Type

   Cost      Fair Value  

1st Lien/Senior Secured Debt

   $ 156,008      $ 142,010  

Unsecured Debt

     11,598        12,166  

Equity/Other

     526        501  
  

 

 

    

 

 

 

Total Investments

   $ 168,132      $ 154,677  
  

 

 

    

 

 

 

As of December 31, 2016, the industry composition of the Company’s portfolio at fair value was as follows:

 

Industry

   December 31, 2016  

Wireless Telecommunications Services

     33.8

Metals & Mining

     9.0  

Building Cleaning and Maintenance Services

     8.1  

Hardware

     7.9  

Radio Broadcasting

     6.0  

Wireless Communications

     5.2  

Consumer Discretionary

     4.3  

Real Estate Holding Company

     3.9  

Casinos and Gaming

     3.7  

Real Estate Services

     3.5  

Maritime Security Services

     2.8  

Information and Data Services

     2.7  

Hotel Operator

     2.3  

Grain Mill Products

     1.8  

Enterprise Software Company

     1.7  

Biological Products

     1.1  

Real Estate Services

     1.0  

Consumer Financing

     0.7  

Internet Advertising

     0.5  
  

 

 

 

Total

     100.0
  

 

 

 

As of December 31, 2016, the geographic composition of the Company’s portfolio at fair value was as follows:

 

Geographic

   December 31, 2016  

United States

     70.1

United Kingdom

     29.9
  

 

 

 

Total

     100.0
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-46


Table of Contents
Index to Financial Statements

GREAT ELM CAPITAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of and for the year ended December 31, 2017 and

Dollar amounts in thousands, except share and per share amounts

1. ORGANIZATION

Great Elm Capital Corp. (the “Company”) was formed on April 22, 2016 as a Maryland corporation. The Company is structured as an externally managed, non-diversified closed-end management investment company. The Company elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company is managed by Great Elm Capital Management, Inc., a Delaware corporation (“GECM”), a subsidiary of Great Elm Capital Group, Inc., a Delaware corporation (“Great Elm Capital Group”).

The Company seeks to generate current income and capital appreciation through debt and equity investments. The Company invests primarily in secured and senior unsecured debt instruments that it purchases in the secondary markets.

The Company and Full Circle Capital Corporation, a Maryland corporation (“Full Circle”), entered into an Agreement and Plan of Merger, dated as of June 23, 2016 (the “Merger Agreement”). The Merger Agreement provided for the merger of Full Circle with and into the Company (the “Merger”). The Company agreed to provide indemnity to Full Circle’s directors and officers under certain circumstances. The Company has concluded that its indemnification obligation is remote as of the date of the accompanying financial statements. The Merger was completed on November 3, 2016 and the Company began operations on November 4, 2016. The Company accounted for the Merger as a business combination under Accounting Standards Codification (ASC) Topic 805, Business Combinations (“ASC 805”). The consideration for the Merger consisted of 4,986,585 shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”).

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation . The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X and Regulation S-K. The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification Topic 946, Financial Services—Investment Companies .

The Company’s December 31, 2016 consolidated financial statements were reclassified in order to be consistent with the format used for the December 31, 2017 consolidated financial statements.

Prior to the Merger, the Company applied ASC Topic 915, Development Stage Entities (“ASC 915”) and accordingly had determined whether costs incurred were to be charged to expense when incurred or were to be capitalized or deferred. The Company concluded that costs incurred before the date of the Merger were contingent and these costs were charged to expense as permitted under ASC 915.

Basis of Consolidation . Under the Investment Company Act, Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, the Company is generally precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to the Company. The accompanying consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned, or previously wholly-owned, subsidiaries TransAmerican Asset Servicing Group, Inc., PE Facility Solutions, LLC, Double Deuce Lodging LLC, and FC Shale Inc. All intercompany balances and transactions have been eliminated in consolidation.

 

F-47


Table of Contents
Index to Financial Statements

Use of Estimates . The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Revenue Recognition . Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts, earned with respect to capital commitments, are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. The Company currently has no investments with fixed exit fees. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are generally included in interest income.

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. For debt instruments where the Company received original issue discounts, when principal payments on the debt instrument are received in an amount in excess of the debt instrument’s amortized cost, the excess principal payments are recorded as interest income.

Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) . The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the first-in first-out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Organization and Merger Related Costs . Organization and Merger-related costs, including costs relating to the formation and incorporation of the business were deemed to be incurred by the Company only subsequent to the Merger being completed.

Cash and Cash Equivalents . Cash and cash equivalents typically consist of bank demand deposits.

Valuation of Portfolio Investments . The Company carries its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Company’s board of directors (the “Board of Directors”).

 

F-48


Table of Contents
Index to Financial Statements

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 4.

The Company values its portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by the Board of Directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of the Company, (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (3) are able to transact for the asset, and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. The Company generally obtains market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. Short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of the Company’s investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with the Company’s documented valuation policy that has been reviewed and approved by the Board of Directors, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may 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 our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where the Company believes that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security.

The valuation process approved by the Board of Directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:

 

   

The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to an independent valuation firm (or firms) approved by the Board of Directors;

 

   

Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented, discussed, and iterated with senior management of GECM;

 

   

The fair value of investments comprising in the aggregate less than 5% of the 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 of Directors approves, the fair value of the investments in the Company’s portfolio in good faith based on the input of GECM, the respective

 

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independent valuation firms (to the extent applicable) and the inputs of each of the audit committee of the Board of Directors and the Board of Directors.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.

Foreign Currency Translation . Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (1) investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates effective on the date of valuation; and (2) purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates prevailing on the transaction dates. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.

U.S. Federal Income Taxes . From inception to September 30, 2016, the Company was a taxable association under Internal Revenue Code of 1986, as amended (the “Code”). The Company has elected to be taxed as a regulated investment company (“RIC”) under subchapter M of the Code for the partial taxable period beginning on October 1, 2016 and ending December 31, 2016. The Company intends to operate in a manner so as to qualify for the tax treatment applicable to RICs in that taxable year and all future taxable years. In order to qualify as a RIC, among other things, the Company will be required to timely distribute to its stockholders at least 90% of investment company taxable income (“ICTI”) including payment-in-kind (“PIK”) interest, as defined by the Code, for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed prior to the 15th day of the ninth month after the tax year-end. So long as the Company maintains its status as a RIC, the Company generally will not be subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.

If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise

 

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tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

The Company has accrued $124 of excise tax expense in fiscal 2017 and accrued $80 of excise tax expense in fiscal 2016.

At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Company of any liability for federal income tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of the capital loss carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term and $30,169 are long term.

ASC 740 Accounting for Uncertainty in Income Taxes ( ASC 740 ) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior years, as applicable), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.

Recent Accounting Developments.

In March 2017, FASB issued ASU No. 2017-08; Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The application of this guidance is not expected to have a material impact on the accompanying consolidated financial statements and related disclosures.

3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES

Investment Management Agreement. On September 27, 2016, the Company entered into an investment management agreement (the “Investment Management Agreement”) with GECM in connection with the transactions described in Note 8. Beginning on November 4, 2016, the Company began accruing for GECM’s fees for its services under the Investment Management Agreement. This fee consists of two components: a base management fee and an incentive fee.

Management Fee The base management fee is calculated at an annual rate of 1.50% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee will be payable quarterly in arrears. The base management fee is calculated based on the average

 

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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 year ended December 31, 2017 and the period ended December 31, 2016, management fees amounted to $2,298 and $392, respectively. As of December 31, 2017 and December 31, 2016, $612 and $392 remained payable, respectively.

Incentive Fee The incentive fee consists of two components, an investment income component and a capital gains component. Under the investment income component, on a quarterly basis, the Company will pay GECM 20% of the amount by which the Company’s pre-incentive fee net investment income (the “Pre-Incentive Fee Net Investment Income”) for the quarter exceeds a hurdle rate of 1.75% (7.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which GECM receives all of such income in excess of the 1.75% level but less than 2.1875% (8.75% annualized) and subject to a total return requirement (described below). The effect of the “catch-up” provision is that, subject to the total return provision, if pre-incentive fee net investment income exceeds 2.1875% of the Company’s net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Company’s pre-incentive fee net investment income as if the 1.75% hurdle rate did not apply. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.

Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Company and its consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee Net Investment Income does not include any realized capital gains or losses or unrealized capital appreciation or depreciation. Accrued Unpaid Income as of December 31, 2017 was $20,168. Accrued Unpaid Income includes PIK income of $11,709 earned during the year ended December 31, 2017 and $1,962 of accrued interest income that is expected to PIK under PIK toggle elections. Accrued Unpaid Income as of December 31, 2016 was $4,199. Accrued Unpaid Income as of December 31, 2016 includes $1,128 of accrued interest income that is expected to PIK under PIK toggle elections.

Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the “Accrued Unpaid Income Incentive Fees”) is deferred, on a security by security basis, and becomes payable only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (A) reduce Pre-Incentive Fee Net Investment Income and (B) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.

Under the capital gains component of the incentive fee, the Company is obligated to pay GECM at the end of each calendar year 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.

Payment of the incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20% of the cumulative net increase in net assets resulting from operations from and after

 

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November 4, 2016 exceeds the cumulative incentive fees accrued and/or paid from and after November 4, 2016. For the purposes of this calculation, the “cumulative net increase in net assets resulting from operations” is the sum of the Company’s pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation from and after November 4, 2016.

For the year ended December 31, 2017 and the period ended December 31, 2016, the Company incurred Incentive Fees based on income of $4,394 and $863, respectively. As of December 31, 2017 and December 31, 2016, $5,257 and $863 remained payable of which $5,257 of the payable at December 31, 2017 and $863 of the payable at December 31, 2016 was Accrued Unpaid Income Incentive Fees and $0 was immediately payable after calculating the total return requirement. For the year ended December 31, 2017 and the period ended December 31, 2016, the Company accrued Incentive Fees based on capital gains of $0.

The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as an investment adviser of the Company.

The Company’s chief executive officer is also 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 an executive officer of GECM, and serves as GECM’s chief compliance officer.

Administration Fees . On September 27, 2016, the Company entered into an administration agreement (the “Administration Agreement”) with GECM to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping record keeping services and other administrative services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement.

GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the “Compensation Expenses”), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period. GECM’s expense cap was calculated retrospectively for the year ending November 4, 2017 and the cap on costs was determined to be $0 and $70 of the $80 accrued at December 31, 2016 was reversed for the year ended December 31, 2017 with $10 due from our sub-administrator remaining waived.

The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.

 

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For the year ended December 31, 2017 and the period ended December 31, 2016, the Company incurred expenses under the Administration Agreement of $1,362 and $224, respectively. As of December 31, 2017 and December 31, 2016, $257 and $138 remained payable, respectively.

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 Instruments.

Level 2 Instruments Valuation Techniques and Significant Inputs

 

Equity and Fixed Income    The types of instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency may include commercial paper, most government agency obligations, certain corporate debt securities, certain mortgage-backed securities, certain bank loans, less liquid publicly listed equities, certain state and municipal obligations, certain money market instruments and certain loan commitments.
   Valuations of Level 2 Equity and Fixed Income instruments can be verified to quoted prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

 

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Level 3 Instruments Valuation Techniques and Significant Inputs

 

Bank Loans, Corporate Debt, and Other Debt Obligations    Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on an analysis of market comparables, transactions in similar instruments and/or recovery and liquidation analyses.
Equity   

Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:

 

•   Transactions in similar instruments;

 

•   Discounted cash flow techniques;

 

•   Third party appraisals; and

 

•   Industry multiples and public comparables.

 

Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:

 

•   Current financial performance as compared to projected performance;

 

•   Capitalization rates and multiples; and

 

•   Market yields implied by transactions of similar or related assets.

As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of December 31, 2016 and December 31, 2017. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment (if any), call provisions and comparable company valuations. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively, in the fair value.

The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2017:

 

Assets

   Level 1      Level 2      Level 3      Total  

Secured and Unsecured Debt

   $ —        $ 80,732      $ 83,789      $ 164,521  

Equity/Other

     213        —          136        349  

Short Term Investments

     65,890        —          —          65,890  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment assets

   $ 66,103      $ 80,732      $ 83,925      $ 230,760  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2016:

 

Assets

   Level 1      Level 2      Level 3      Total  

1st Lien/Senior Secured and Unsecured Debt

   $ —        $ 58,031      $ 83,979      $ 142,010  

Equity/Other

     —          —          501        501  

Unsecured Debt

     —          12,166        —          12,166  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment assets

   $ —        $ 70,197      $ 84,480      $ 154,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a reconciliation of Level 3 assets for the year ended December 31, 2017:

 

Level 3

  Beginning
Balance
as of
January 1,
2017
    Purchases (1)     Net
Realized
Gain (Loss)
    Net Change
in Unrealized
Appreciation
(Depreciation)
    Sales and
Settlements (1)
    Net
Amortization
of Premium/
Discount
    Ending
Balance
as of
December 31,
2017
 

Senior Secured and Unsecured Debt

  $ 83,979     $ 139,859     $ 2,053     $ (2,854   $ (142,824   $ 3,576     $ 83,789  

Equity/Other

    501       2,137       (321     17       (2,198     —         136  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment assets

  $ 84,480     $ 141,996     $ 1,732     $ (2,837   $ (145,022   $ 3,576     $ 83,925  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation of Level 3 assets for the period from November 4, 2016 (commencement of operations as a BDC) through December 31, 2016:

 

Level 3

  Beginning
Balance
as of
November 3,
2016
    Purchases (1)     Net
Realized
Gain
(Loss)
    Net Change
in Unrealized
Appreciation
(Depreciation) (2)
    Sales and
Settlements (1)
    Net
Amortization
of Premium/
Discount
    Ending
Balance
as of
December 31,
2016
 

Senior Secured and Unsecured Debt

  $ 88,849     $ 35,771     $ 274     $ (926   $ (41,738   $ 1,749     $ 83,979  

Equity/Other

    526       —         —         (25     —         —         501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment assets

  $ 89,375     $ 35,771     $ 274     $ (951   $ (41,738   $ 1,749     $ 84,480  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Purchases may include PIK, securities received in corporate actions and restructurings. Sales and Settlements may include securities delivered in corporate actions and restructuring of investments.

(2)  

Change in unrealized appreciation (depreciation) relating to assets still held at December 31, 2017 totaled $(3,315) consisting of the following: Senior Secured and Unsecured Debt $(3,332) and Equity/Other $17. Change in unrealized appreciation (depreciation) relating to assets still held at December 31, 2016 totaled $(951) consisting of the following: Senior Secured and Unsecured Debt $(926) and Equity/Other $(25).

No securities were transferred into the Level 3 hierarchy and no securities were transferred out of the Level 3 hierarchy during the period from November 4, 2016 through December 31, 2016 or for the year ended December 31, 2017. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.

The tables below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets and liabilities as of December 31, 2016 and December 31, 2017, respectively. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien/Senior Secured is appropriate for valuing that specific debt investment, but may not be appropriate

 

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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.

December 31, 2017

 

Level 3 Instruments

 

Level 3 Assets as of

December 31, 2017

 

Significant Unobservable

Inputs by Valuation

Techniques 1

 

Range of Significant
Unobservable

Inputs (Weighted Average 3 ) as

of

December 31, 2017

Bank Loans, Corporate Debt, and Other Debt Obligations

 

1st Lien/Senior Secured and Unsecured Debt

$83,789

 

Discounted cash flows:

•   Discount Rate

Comparable multiples:

•   EV/EBITDA 4

Liquidation/Waterfall analysis:

•   EV/EBITDA 4

 

7.69% - 38.75% (11.30%)

 

4.25 - 13.75 (6.68)

Equity

  Common Stock, LLC Units and Warrants on private stock $0   Liquidation Value   N/A

Equity

  Warrants on publicly traded stock $136   Volatility:   67.99% - 67.99% (67.99%)

December 31, 2016

 

Level 3 Instruments

 

Level 3 Assets as of

December 31, 2016

 

Significant Unobservable

Inputs by Valuation

Techniques 1

 

Range 2 of Significant
Unobservable

Inputs (Weighted Average 3 ) as

of

December 31, 2016

Bank Loans, Corporate Debt, and Other Debt Obligations

 

1st Lien/Senior Secured and Unsecured Debt

$83,979

 

Unsecured Debt $0

 

Discounted cash flows:

•   Discount Rate

Comparable multiples:

•   EV/EBITDA 4

Liquidation/Waterfall analysis:

•   EV/EBITDA 4

Liquidation Value

 

11.85% - 39.80% (16.33%)

 

3.50 - 6.35 (5.76)

 

$0 - $0 ($0)

Equity

 

Common Stock, LLC Units and Warrants on private stock

$314

 

Comparable multiples:

•   EV/EBITDA 4

Liquidation Value

 

3.50 - 6.00 (6.00)

 

$68 - $68 ($68)

Equity

  Warrants on publicly traded stock $119   Volatility:   71.10% - 71.10% (71.10%)

 

(1)  

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(2)  

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(3)  

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

 

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(4)  

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization.

5. DEBT

On November 3, 2016, the Company assumed $33,646 of Full Circle 8.25% Senior Notes due 2020 (the “2020 Notes”) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016. The 2020 Notes had a maturity date of June 30, 2020 and on October 20, 2017 we redeemed them completely at their par value plus accrued and unpaid interest.

On September 13, 2017, we offered $28,375 in aggregate principal amount of 6.50% notes due 2022 (the “GECCL Notes”). On September 29, 2017, we sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise of the underwriters’ over-allotment option. As a result of the issuance of these Notes, the aggregate principal balance of Notes outstanding is $32,631.

The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes on January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

As part of the offering, the Company incurred fees and costs, which are treated as a reduction of the carrying amount of the debt on our Statements of Assets and Liabilities. These deferred financing costs presented as a reduction to the Notes payable balance are being amortized into interest expense over the term of the Notes.

The Investment Company Act limits, with certain exceptions, the Company’s borrowing such that its asset coverage ratio, as defined in the Investment Company Act, is at least 2 to 1 after such borrowing. As of December 31, 2017, the Company’s outstanding borrowings were $32,631, and the Company’s asset coverage ratio was 5 to 1.

Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following tables as of December 31, 2017 and December 31, 2016.

 

Year

   Total Amount
Outstanding (1)
     Asset Coverage
Ratio Per Unit (2)
     Involuntary Liquidation
Preference Per Unit (3)
     Average Market
Value Per Unit (4)
 

Unsecured Debt - GECCL Notes

           

December 31, 2017

   $ 32,631      $ 5.01      $ N/A      $ 1.017  

Unsecured Debt - 2020 Notes

           

December 31, 2016

   $ 33,646      $ 6.17      $ N/A      $ 1.016  

 

(1)  

Total amount of each class of senior securities outstanding at the end of the period presented.

(2)  

Asset coverage per unit is the ratio of the carrying value of Great 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 of indebtedness.

 

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(3)  

The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.

(4)  

Not applicable for senior securities that are not registered for public trading. The average market value per unit for the Notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness for each year and since November 4, 2016 for the period ended December 31, 2016.

The indenture’s covenants, include compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the Investment Company Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder. As of December 31, 2017, the Company had not repurchased any of the Notes. As of December 31, 2017 and December 31, 2016, the Company was in compliance with all covenants under the indentures.

 

    

Period Ended

December 31, 2016

 

Borrowing interest expense

   $ 460  

Facility fees

     —    

Amortization of acquisition premium

     (40
  

 

 

 

Total

   $ 420  
  

 

 

 

Weighted average interest rate

     7.86

Average outstanding balance

   $ 33,646  

 

     As of December 31, 2016  
Facility    Commitments     

Borrowings

Outstanding

    

Fair

Value

 

Notes

   $ 33,646      $ 33,646      $ 34,184  
  

 

 

    

 

 

    

 

 

 

Total

   $ 33,646      $ 33,646      $ 34,184  
  

 

 

    

 

 

    

 

 

 

The fair value of the 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.

The summary information of the 2020 Notes for the year ended December 31, 2017, is as follows:

 

     Twelve
Months
Ended
December 31,

2017 (1)
 

Borrowing interest expense

   $ 2,236  

Amortization of acquisition premium

     (888
  

 

 

 

Total

   $ 1,348  
  

 

 

 

Weighted average interest rate

     4.99

Average outstanding balance

   $ 33,646  

 

(1)  

The information presented for the 2020 Notes is for the period from January 1, 2017 through October 20, 2017, which represents the date the 2020 Notes were redeemed in full.

 

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The summary information of the GECCL Notes for the year ended December 31, 2017, is as follows:

 

     Twelve
Months
Ended
December  31,
2017 (2)
 

Borrowing interest expense

   $ 607  

Amortization of acquisition premium

     84  
  

 

 

 

Total

   $ 691  
  

 

 

 

Weighted average interest rate

     7.36

Average outstanding balance

   $ 32,631  

 

(2)  

The information presented for the GECCL Notes is for the period from September 19, 2017, which represents the date the GECCL Notes were issued, through December 31, 2017.

 

     December 31, 2017  
Facility    Commitments     

Borrowings

Outstanding

    

Fair

Value

 

Unsecured Debt - GECCL Notes

   $ 32,631      $ 32,631      $ 33,218  
  

 

 

    

 

 

    

 

 

 

Total

   $ 32,631      $ 32,631      $ 33,218  
  

 

 

    

 

 

    

 

 

 

The fair value of the 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.

6. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of December 31, 2017, the Company had approximately $7,786 in unfunded loan commitments, subject to the 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 December 31, 2017 are included in the Company’s Statement of Assets and Liabilities and the corresponding Schedule of Investments. The Company believes that it had sufficient cash and other liquid assets on its balance sheet to satisfy the unfunded commitments.

Two complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al., filed on September 23, 2016 (the “Saunders Action”), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the “Russell Action”), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the “Circuit Court”), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the “Speiser Action”, and together with the Saunders Action and the Russell Action, the “Actions”).

On October 24, 2016, the Company, Full Circle, Great Elm Capital Group, MAST Capital, certain directors of the Full Circle and plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have

 

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merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and the Company agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.

7. 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.

8. CAPITAL TRANSACTIONS

Formation Transaction

On June 23, 2016, Great Elm Capital Group contributed $30,000 to the Company and the Company issued 30 shares of Common Stock. Such shares were recapitalized into an aggregate of 1,966,667 shares of Common Stock upon the contribution of the Initial GECC Portfolio.

The Company, Great Elm Capital Group and funds managed by MAST Capital (the “MAST Funds”) entered into a Subscription Agreement, dated as of June 23, 2016 (the “Subscription Agreement”). The Subscription Agreement provided for (a) the $30,000 capital contribution by Great Elm Capital Group in exchange for 1,966,667 shares of Company Common Stock and (b) contribution by the MAST Funds of a portfolio of debt instruments (the “Initial GECC Portfolio”) to the Company in exchange for 5,935,800 shares of Common Stock.

On September 27, 2016, the MAST Funds conveyed the Initial GECC Portfolio to the Company and that transaction settled November 1, 2016. On November 1, 2016, the Company issued 5,935,800 shares of Common Stock in exchange for the Initial GECC Portfolio in settlement of the transaction. Under ASC 805, the Company accounted for the contribution of the Initial GECC Portfolio as an asset acquisition as of the settlement date. The cost amounts reflected in the following table are the price at which the assets were transferred, which is viewed as representative of fair value as of November 1, 2016, and the total is included in the accompanying consolidated statement of changes as “Shares issued – formation transactions.”

 

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As of November 3, 2016, the Initial GECC Portfolio was comprised of:

 

Portfolio Company

 

Industry

 

Type of

Investment

  Interest     Maturity     Par Amount/
Quantity
    Cost     Fair Value  

Avanti Communications Group plc

  Wireless Telecommunications Services   Sr. Secured Notes     10.00     10-1-19     $ 70,035     $ 54,629     $ 53,577  

Everi Payments Inc.

  Hardware   Sr. Unsecured Notes     10.00     1-15-22     $ 12,289       11,581       11,705  

Optima Specialty Steel Inc.

  Metals and Mining   Sr. Secured Notes     12.50     12-15-16     $ 15,100       13,726       14,164  

Tallage Lincoln, LLC

  Real Estate Services   Sr. Secured Term Loan     10.00     5-21-18     $ 372       372       372  

Tallage Adams, LLC

  Real Estate Services   Sr. Secured Term Loan     10.00     12-12-16     $ 169       181       181  

Trilogy International Partners

  Wireless Telecommunications Services   Sr. Secured Notes     13.375     5-15-19     $ 10,000       10,005       10,000  
           

 

 

   

 

 

 

Total

            $ 90,494     $ 89,999  

In the Subscription Agreement, the Company agreed, to reimburse costs associated with the transactions contemplated by the Subscription Agreement and the Merger Agreement incurred by Great Elm Capital Group and the MAST Funds, if the transaction closed. See Note 6.

Merger

On June 23, 2016, the Company entered into the Merger Agreement with Full Circle. Following approval of the Merger on October 31, 2016 by Full Circle’s stockholders, on November 3, 2016:

 

   

Full Circle merged into the Company resulting in the Company’s acquisition, by operation of the Merger, of Full Circle’s portfolio that we valued at $74,658 at November 3, 2016;

 

   

The Company became obligated to issue an aggregate of 4,986,585 shares of Common Stock to former Full Circle stockholders; and

 

   

The Company’s exchange agent paid a $5.4 million special cash dividend to former Full Circle stockholders.

The Company has accounted for the Merger as a business combination under ASC Topic 805 and Regulation S-X’s purchase accounting guidance. The Company was designated as the accounting acquirer for accounting purposes. The difference between the fair value of Full Circle’s net assets and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than the fair value of the merger consideration paid by the Company. The calculation of the purchase accounting loss is detailed in the table below.

 

Consideration Paid:

  

Common stock issued

   $ 73,541  

Assets acquired:

  

Cash and cash equivalents

     29,109  

Investments

     74,658  

Other assets

     2,252  

Liabilities assumed:

  

Notes payable

     (34,574

Other liabilities

     (2,600
  

 

 

 

Net assets acquired

     68,845  
  

 

 

 

Purchase accounting loss

   $ 4,698  
  

 

 

 

 

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The Company incurred approximately $3,471 of transaction-related expenses related to the Formation Transaction and Merger during the period ended December 31, 2016. Transaction-related expenses are comprised primarily of legal, accounting and other professional fees and third party costs.

The following table provides the pro forma consolidated operational data as if the Merger had occurred on January 1, 2016 and we were in operations for the full year. The pro forma consolidated operational data is based on assumptions and estimates; however, these pro forma results are not indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the period presented, nor do they purport to represent the consolidated results of operations for future periods. Information presented for the year ended December 31, 2015 represents Full Circle’s financial information for the period, unadjusted.

 

     Twelve Months Ended     Twelve Months Ended  
(in thousands, except per share data)    December 31, 2016     December 31, 2015  

Total Investment Income

   $ 17,125     $ 18,320  

Net Investment Income

     5,853       9,204  

Net Decrease in Net Assets Resulting from Operations

   $ (12,383   $ (7,197

Weighted average common shares outstanding

     6,953       4,957  

Net Decrease in Net Assets Resulting from Operations per share, basic and diluted

   $ (1.78   $ (1.45

Issuer Purchases of Equity Securities

During the year ended December 31, 2017 the Company purchased 2,138,479 shares under its tender offer and $15,000 stock buyback program at a weighted average price of $11.20 per share. As of December 31, 2017, the Company had cumulatively purchased 2,236,651 shares under its tender offer and stock buyback program at a weighted average price of $11.18 per share, resulting in $14,995 of cumulative cash paid, under the program since November 4, 2016. Including the tender offer, the Company utilized $24,995 under its stock buyback and tender program for repurchasing shares.

 

Month   Total Number of
Shares Purchased
    Average Price Per
Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Program
    Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
(Amounts in dollars)
 

January 2017

    132,434     $ 11.48       132,434     $ 12,425,611  

February 2017

    72,678     $ 11.26       72,678     $ 11,607,509  

March 2017

    40,617     $ 11.09       40,617     $ 11,157,069  

April 2017

    16,846     $ 11.38       16,846     $ 10,965,351  

May 2017 (1)

    944,535     $ 11.44       944,535     $ 10,158,722  

June 2017

    15,215     $ 10.42       15,215     $ 10,000,182  

July 2017

    47,961     $ 10.73       47,961     $ 9,485,725  

August 2017

    37,666     $ 10.78       37,666     $ 9,079,585  

September 2017

    753,097     $ 11.00       753,097     $ 792,735  

October 2017

    65,945     $ 10.27       65,945     $ 115,277  

November 2017

    11,485     $ 10.04       11,485     $ —    
 

 

 

   

 

 

   

 

 

   

Total 2017

    2,138,479     $ 11.20       2,138,479    

November 2016

    16,030     $ 10.79       16,030     $ 14,826,985  

December 2016

    82,142     $ 10.72       82,142     $ 13,946,200  
 

 

 

   

 

 

   

 

 

   

Total 2016

    98,172     $ 10.73       98,172    

Total

    2,236,651     $ 11.18       2,236,651     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)  

Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10,000 tender offer we announced on March 30, 2017 that expired on May 5, 2017.

9. EARNINGS PER SHARE

The following information sets forth the computation of basic and diluted earnings per share for the year ended December 31, 2017:

 

     For the Year
Ended
December 31,
 
     2017  

Numerator for basic and diluted earnings per share - increase in net assets resulting from operations

   $ (2,754

Denominator for basic and diluted earnings per share - weighted average shares outstanding

     11,655,370  

Basic and diluted earnings per share

   $ (0.24

The following information sets forth the computation of basic and diluted earnings per share for the period ended December 31, 2016:

 

     Period Ended
December 31, 2016
 

Numerator for basic and diluted earnings per share - decrease in net assets resulting from operations

   $ (17,874

Denominator for basic and diluted earnings per share - weighted average shares outstanding

     12,853  

Basic and diluted earnings per share

   $ (1.39

Weighted average shares outstanding represents the weighted average shares outstanding after giving effect to the Merger and Formation Transactions, and as such is calculated from November 3, 2016 through December 31, 2016 for the period ended December 31, 2016.

Diluted earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the periods presented.

10. TAX INFORMATION

The tax character of distributions during the year ended December 31, 2017 and the period ended December 31, 2016, were as follows:

 

     Year Ended      Period Ended  
     December 31, 2017      December 31, 2016  

Distributions paid from:

     

Ordinary Income

   $ 13,682      $ 2,123  

Net Long-Term Capital Gains

     0        0  
  

 

 

    

 

 

 

Total Taxable Distributions

   $ 13,682      $ 2,123  
  

 

 

    

 

 

 

 

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The components of Distributable Earnings (Losses) on a tax basis were as follows:

 

     December 31, 2017      December 31, 2016  

Undistributed Ordinary Income - net

   $ 3,488      $ 1,781  

Capital Loss Carryforwards

   $ (46,984    $ (41,842
  

 

 

    

 

 

 

Total Undistributed Earnings

   $ (43,496    $ (40,061
  

 

 

    

 

 

 

Unrealized Earnings (Losses) - net

   $ (22,750    $ (6,402
  

 

 

    

 

 

 

Total Accumulated Earnings (Losses) - net

   $ (66,246    $ (46,463
  

 

 

    

 

 

 

The Company’s aggregate unrealized appreciation and depreciation on investments based on cost for U.S. federal income tax purposes were as follows:

 

     December 31, 2017      December 31, 2016  

Tax cost

   $ 253,510      $ 224,762  

Gross unrealized appreciation

   $ 2,353      $ 1,837  

Gross unrealized depreciation

   $ (25,103    $ (8,239
  

 

 

    

 

 

 

Net unrealized depreciation on investments

   $ (22,750    $ (6,402
  

 

 

    

 

 

 

The difference between GAAP-basis and tax basis unrealized gains (losses) is attributable primarily to differences in the tax treatment of underlying fund investments.

In order to present certain components of the Company’s capital accounts on a tax-basis, certain reclassifications have been recorded to the Company’s accounts. These reclassifications have no impact on the net asset value of the Company’s and result primarily from dividend redesignations, certain non-deductible expenses, and differences in the tax treatment of paydown gains and losses.

 

     December 31, 2017      December 31, 2016  

Paid-in capital in excess of par

   $ 3,349      $ 26,464  

Accumulated undistributed net investment income

   $ (729    $ 3,454  

Accumulated net realized gain (loss)

   $ (2,620    $ (29,918

At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Company of any liability for federal income tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of the capital loss carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term and $30,169 are long term.

ASC 740 Accounting for Uncertainty in Income Taxes ( ASC 740 ) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the 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,

 

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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.

11. FINANCIAL HIGHLIGHTS

Below is the schedule of financial highlights of the Company:

 

     For the Year
Ended
December 31,
   

November 3, 2016

(Commencement
of Operations) to

December 31,

 
     2017     2016 (5)  

Per Share Data: (1)

    

Net asset value, beginning of period

   $ 13.52     $ 14.41  

Net investment income

     1.52       0.28  

Net realized gains

     0.31       0.02  

Net unrealized losses

     (2.13     (1.05
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (0.30     (0.75
  

 

 

   

 

 

 

Accretion from share buybacks

     0.40       0.03  

Distributions declared from net investment income (2)

     (1.20     (0.17
  

 

 

   

 

 

 

Net decrease resulting from distributions to common stockholders

     (1.20     (0.17
  

 

 

   

 

 

 

Net asset value, end of period

   $ 12.42     $ 13.52  
  

 

 

   

 

 

 

Shares outstanding, end of year/period

     10,652,401       12,790,880  

Total return based on net asset value (3)

     0.69     (5.30 )% 

Total return based on market value (3)

     (5.56 )%      (2.03 )% 

Ratio/Supplemental Data (all amounts in thousands except ratios):

 

 

Net assets, end of period

   $ 132,287     $ 172,984  

Average net assets

   $ 151,986     $ 179,366  

Ratio of expenses (without management fees, incentive fees and interest and credit facility expenses) to average net assets (4,6)

     2.25     4.37

Ratio of management fees to average net assets (4)

     1.51     1.38

Ratio of interest and credit facility expenses to average net assets (4)

     1.34     1.48

Ratio of incentive fees to average net assets (4)

     2.89     3.04

Ratio of total expenses to average net assets before waiver (4,6)

     7.87     10.27

Ratio of total expenses to average net assets after waiver (4,6)

     8.00     9.99

Ratio of net investment income to average net assets (4,6)

     11.56     10.52

Portfolio turnover

     116     27

 

(1)  

The per share data was derived by using the weighted average shares outstanding during the period, except where such calculations deviate from those specified under the instructions to Form N-2.

(2)  

The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.

(3)  

Total return based on net asset value is calculated as the change in net asset value per share, assuming the 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. For the period ended December 31, 2016, total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming the Company’s

 

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  distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming the Company’s distributions were reinvested through its dividend reinvestment plan, and is assumed to be $12.03 on November 4, 2016. $12.03 represents the closing price of Full Circle’s common stock on its last day of trading prior to the merger, as adjusted by the exchange ratio in the merger agreement.
(4)  

Annualized.

(5)  

Net asset value at the beginning of the period is the net asset value per share as of the consummation of the Merger, as described further in Note 8. Management corrected this heading to correspond to the timing of the Merger. The heading was corrected to read “November 3, 2016 to December 31, 2016,” whereas it had previously been presented as “November 4, 2016 (commencement of operations) to December 31, 2016.” November 3, 2016 is the date on which the Merger closed; November 4, 2016 is the date on which the Company began operating as the combined entity resulting from the Merger. On November 3, 2016, the Company recognized approximately $3,444 of organization costs in connection with the Merger, which were included in calculating the beginning of the period net asset value, and amounted to ($0.27) per share, based on 12,889,104 shares issued and outstanding on November 3, 2016.

(6)  

Management corrected the expense ratios to reflect $3,444 of one-time non-recurring organization costs incurred in connection with the merger/formation transaction in the applicable ratio. The ratio of expenses (without management fees, incentive fees and interest and credit facility expenses) to average net assets was corrected to 4.37% (an increase of 1.92 percentage points); the ratio of total expenses to average net assets before waiver was corrected to 10.27% (an increase of 1.92 percentage points), the ratio of total expenses to average net assets after waiver was corrected to 9.99% (an increase of 1.92 percentage points); and the ratio of net investment income to average net assets was corrected to 10.52% (a reduction of 1.92 percentage points).

12. AFFILIATED AND CONTROLLED INVESTMENTS

Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at December 31, 2017 represented 1.34% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these affiliated investments was as follows:

 

        For the twelve months ended
December 31, 2017
    For the twelve months ended
December 31, 2017
 

Non-Controlled,

Affiliated Investments

  Issue (1)   Fair Value at
December 31,
2016
    Gross
Additions
(Cost) (2)
    Gross
Reductions
(Cost) (3)
    Net
Unrealized
Gain
(Loss)
    Fair
Value at
December 31,
2017
    Net
Realized
Gain
(Loss)
    Change
in Net
Unrealized
Gain
(Loss)
    Interest
Income
    Fee
Income
    Dividend
Income
 

OPS Acquisitions Limited and Ocean Protection Services Limited

  Term Loan   $ 4,286     $ 25     $ (40   $ (2,501   $ 1,770     $ —       $ (2,470   $ 73     $ —       $ —    

OPS Acquisitions Limited and Ocean Protection Services Limited

  Equity (19%
of class)
    —         —         —         —         —         —         —         —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  Term Loan   $ 4,286     $ 25     $ (40   $ (2,501   $ 1,770     $ —       $ (2,470   $ 73     $ —       $ —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Non-unitized equity investments are disclosed with percentage ownership in lieu of quantity.

(2)  

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)  

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

 

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Controlled investment as defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at December 31, 2017 represented 13.68% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these controlled investments was as follows:

 

          For the twelve months ended
December 31, 2017
    For the twelve months ended
December 31, 2017
 

Controlled

Investments

  Issue (1)     Fair Value at
December 31,
2016
    Gross
Additions
(Cost) (2)
    Gross
Reductions
(Cost) (3)
    Net
Unrealized
Gain
(Loss)
    Fair
Value at
December 31,
2017
    Net
Realized

Gain
(Loss)
    Change
in Net
Unrealized

Gain
(Loss)
    Interest
Income
    Fee
Income
    Dividend
Income
 

Texas Westchester Financial, LLC

   
Equity (100%
of class)
 
 
  $ 68     $ —       $ (68   $ —       $ —       $ (8   $ —       $ —       $ —       $ —    

PE Facility Solutions, LLC

    Revolver       —         51,166       (51,166     —         —         —         —         58       36       —    
    Term Loan A       —         10,000       (100     —         9,900       —         —         1,035       —         —    
    Term Loan B       —         8,587       —         (383     8,204       —         (383     1,209       —         —    
   
Equity (83%
of class)
 
 
    —         —         —         —         —         —         —         —         —         —    

Double Deuce Lodging, LLC

   
Equity (100%
of class)
 
 
    —         2,138       (2,138     —         —         —         —         —         —         —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

    $ 68     $ 71,891     $ (53,472   $ (383   $ 18,104     $ (8   $ (383   $ 2,302     $ 36     $ —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Non-unitized equity investments are disclosed with percentage ownership in lieu of quantity.

(2)  

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)  

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following are the quarterly results of operations for the period ended December 31, 2016 and the year ended December 31, 2017. The following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

 

    Quarter Ended  
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016 (1)
    September 30,
2016
    June 30,
2016
 

Investment income

  $ 9,710     $ 6,466     $ 6,237     $ 7,315     $ 5,831     $ —       $ —    

Net investment income

    6,433       3,570       3,478       4,094       5       —         —    

Net realized and unrealized losses

    (1,367     (12,302     (5,945     (715     (17,879     —         —    

Net decrease in net assets resulting from operations

    5,066       (8,732     (2,467     3,379       (17,874     —         —    

Basic and diluted earnings (losses) per common share

    0.47       (0.77     (0.20     0.27       (1.39     —         —    

Net asset value per common share at end of quarter

  $ 12.42     $ 12.38     $ 13.29     $ 13.59     $ 13.52     $ —       $ —    

 

(1)  

Partial quarter for the period from November 4, 2016 through December 31, 2016.

 

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14. SUBSEQUENT EVENTS

Subsequent events after the have been evaluated through March 12, 2018. Other than the items discussed below, the Company has concluded that there is no impact requiring adjustment or disclosure in the consolidated financial statements.

In January 2018, we sold our position in Almonde, Inc. at a price of approximately 101% of par value.

In January 2018, we sold a $2.0 million portion of our position in NANA Development Corp. at a price of approximately 101% of par value.

In January 2018, we purchased $5.0 million of par value of Sungard Availability Services, Inc. first lien term loan at a price of approximately 93% of par value. Such debt security bears interest at a rate of 3-Month LIBOR plus 7.00% and matures September 30, 2021.

In February 2018, we purchased $10.0 million of par value of Full House Resorts, Inc. senior secured first lien notes at an issuance price of approximately 98% of par value. Such debt security bears interest at a rate of 3 Month LIBOR plus 7.00% and matures February 2, 2024.

In February 2018, PE Facility Solutions, LLC prepaid approximately $1.0 million of its term loan B at par plus accrued interest.

In February 2018, we purchased an additional $4.4 million of par value of Michael Baker International, LLC second lien bonds at a price of approximately 98% of par value.

In February and March 2018, we purchased an additional $2.6 million of par value of SESAC Holdco II, LLC second lien loan at a price of approximately par.

In March 2018, the court in Caldwell County, Texas ruled in our favor in FCCC v. Pumphrey and awarded us damages of $3,850. This amount is in addition to amounts previously collected on our investment in Luling Lodging LLC. While these damages have been awarded to us, there are no guarantees as to their timing or collectability.

On January 19, 2018, we sold $44,898 in aggregate principal amount of 6.75% notes due 2025 (the “GECCM Notes”).

On February 13, 2018, we sold an additional $1,500 of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option. As a result of the issuance of these Notes, the aggregate principal balance of Notes outstanding is $46,398.

Our Board declared the monthly distributions for the second quarter of 2018 at an annual rate of approximately 8.02% of our December 31, 2017 NAV, which equates to $0.083 per month. The schedule of distribution payments is as follows:

 

Month

       Rate              Record Date            Payable Date    

April

   $ 0.083      April 30, 2018    May 15, 2018

May

   $ 0.083      May 31, 2018    June 15, 2018

June

   $ 0.083      June 29, 2018    July 16, 2018

 

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Full Circle Capital Corporation and Subsidiaries

We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Full Circle Capital Corporation and Subsidiaries (the Company) as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net assets and cash flows for each of the two years in the period ended June 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of June 30, 2016, by correspondence with the custodians, management of the underlying investments, as applicable, or by other appropriate auditing procedures where replies from these parties, as applicable, were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Full Circle Capital Corporation and Subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, and the changes in net assets for each of the two years in the period then ended in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Full Circle Capital Corporation and Subsidiaries’ internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated September 28, 2016 expressed an unqualified opinion on the effectiveness of Full Circle Capital Corporation and Subsidiaries’ internal control over financial reporting.

 

/s/ RSM US LLP
New York, New York
September 28, 2016

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Full Circle Capital Corporation and Subsidiaries

We have audited Full Circle Capital Corporation and Subsidiaries’ internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Full Circle Capital Corporation and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Full Circle Capital Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of assets and liabilities of Full Circle Capital Corporation and Subsidiaries, including the consolidated schedules of investments, as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the two years in the period ended June 30, 2016, and our report dated September 28, 2016 expressed an unqualified opinion.

 

/s/ RSM US LLP
New York, New York
September 28, 2016

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

          June 30, 2016     June 30, 2015  

Assets

       

Control Investments at Fair Value (Cost of $314,312 and $11,409,596, respectively)

      $ 100,000     $ 5,812,064  

Affiliate Investments at Fair Value (Cost of $5,727,925 and $24,434,726, respectively)

        313,355       16,019,272  

Non-Control/Non-Affiliate Investments at Fair Value (Cost of $89,806,480 and $136,351,581, respectively)

        80,708,860       130,282,423  
     

 

 

   

 

 

 

Total Investments at Fair Value (Cost of $95,848,717 and $172,195,903, respectively)

   (NOTE 9)      81,122,215       152,113,759  

Cash

        33,390,695       3,736,563  

Interest Receivable

        993,965       1,903,606  

Principal Receivable

        126,448       23,287  

Distributions Receivable

        —         15,141  

Due from Affiliates

        —         605,749  

Due from Portfolio Investments

        93,450       180,300  

Receivable on Open Swap Contract

        —         1,081  

Prepaid Expenses

        66,149       66,105  

Other Assets

        15,286       1,483,578  

Deferred Offering Expenses

        —         328,168  

Deferred Credit Facility Fees

   (NOTE 8)      51,486       267,645  
     

 

 

   

 

 

 

Total Assets

        115,859,694       160,724,982  
     

 

 

   

 

 

 

Liabilities

       

Due to Affiliates

   (NOTE 5)      388,965       1,052,489  

Accrued Liabilities

        1,486,055       179,378  

Deposit from Swap Counterparty

        —         10,380,000  

Payable for Investments Acquired

        —         15,020,000  

Distributions Payable

        —         813,240  

Interest Payable

        3,889       57,605  

Other Liabilities

        204,313       305,957  

Accrued Offering Expenses

        —         7,258  

Notes Payable 8.25% due June 30, 2020 (plus unamortized premium of $135,498 and $158,504 and less deferred debt issuance costs of $675,046 and $833,541, respectively)

   (NOTE 8)      33,105,977       32,970,488  
     

 

 

   

 

 

 

Total Liabilities

        35,189,199       60,786,415  
     

 

 

   

 

 

 

Commitments and contingencies

   (NOTE 13)      —         —    

Net Assets

      $ 80,670,495     $ 99,938,567  
     

 

 

   

 

 

 

Components of Net Assets

       

Common Stock, par value $0.01 per share (100,000,000 authorized; 22,472,243 and 23,235,430 issued and outstanding, respectively)

      $ 224,722     $ 232,354  

Paid-in Capital in Excess of Par

        128,084,659       132,487,067  

Distributions in Excess of Net Investment Income

        (107,390     (119,318

Accumulated Net Realized Losses

        (32,804,994     (12,579,392

Accumulated Net Unrealized Losses

        (14,726,502     (20,082,144
     

 

 

   

 

 

 

Net Assets

      $ 80,670,495     $ 99,938,567  
     

 

 

   

 

 

 

Net Asset Value Per Share

      $ 3.59     $ 4.30  
     

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

          Year Ended
June 30, 2016
    Year Ended
June 30, 2015
 

Investment Income

       

Interest Income from Non-Control/Non-Affiliate Investments

      $ 12,610,189     $ 13,044,316  

Interest Income from Affiliate Investments

        1,093,451       2,445,713  

Interest Income from Control Investments

        464,244       1,465,069  

Dividend Income from Control Investments

        75,207       36,247  

Other Income from Non-Control/Non-Affiliate Investments

        2,070,241       542,164  

Other Income from Affiliate Investments

        4,314       98,671  

Other Income from Control Investments

        119,385       50,000  

Other Income from Non-Investment Sources

   (NOTE 5)      21,362       67,163  
     

 

 

   

 

 

 

Total Investment Income

        16,458,393       17,749,343  
     

 

 

   

 

 

 

Operating Expenses

       

Management Fee

        1,992,111       2,280,058  

Incentive Fee

        1,263,241       1,798,000  
     

 

 

   

 

 

 

Total Advisory Fees

   (NOTE 5)      3,255,352       4,078,058  
     

 

 

   

 

 

 

Allocation of Overhead Expenses

        212,783       171,559  

Sub-Administration Fees

        246,268       256,236  

Officers’ Compensation

        305,226       303,652  
     

 

 

   

 

 

 

Total Costs Incurred Under Administration Agreement

   (NOTE 5)      764,277       731,447  
     

 

 

   

 

 

 

Directors’ Fees

        168,000       182,196  

Interest Expenses

   (NOTE 8)      3,799,951       4,305,558  

Professional Services Expense

        2,564,170       700,324  

Bank Fees

        33,302       39,931  

Other

        549,864       519,600  
     

 

 

   

 

 

 

Total Gross Operating Expenses

        11,134,916       10,557,114  

Fees Waiver and Expense Reimbursement

   (NOTE 5)      (967,372     (1,420,843
     

 

 

   

 

 

 

Total Net Operating Expenses

        10,167,544       9,136,271  
     

 

 

   

 

 

 

Net Investment Income

        6,290,849       8,613,072  

Net Change in Unrealized Gain (Loss) on Investments

        5,355,642       (6,237,328

Net Realized Gain (Loss) on:

       

Non-Control/Non-Affiliate Investments

        (4,388,061     (4,055,309

Affiliate Investments

        (9,593,394     321,394  

Control Investments

        (5,482,804     (3,842,390

Open Swap Contract

        (1,882,293     1,081  

Foreign Currency Transactions

        (101     (1,248
     

 

 

   

 

 

 

Net Realized Gain (Loss)

        (21,346,653     (7,576,472
     

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

      $ (9,700,162   $ (5,200,728
     

 

 

   

 

 

 

Earnings (Loss) per Common Share Basic and Diluted

   (NOTE 4)    $ (0.43   $ (0.35

Net Investment Income per Common Share Basic and Diluted

      $ 0.28     $ 0.63  

Weighted Average Shares of Common Stock Outstanding Basic and Diluted

        22,662,947       14,803,637  

See notes to consolidated financial statements.

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

 

     Year Ended
June 30, 2016
    Year Ended
June 30, 2015
 

Increase (Decrease) in Net Assets Resulting from Operations:

    

Net Investment Income

   $ 6,290,849     $ 8,613,072  

Net Change in Unrealized Gain (Loss) on Investments

     5,355,642       (6,237,328

Net Realized Gain (Loss) on:

    

Investments and Open Swap Contract

     (21,346,552     (7,575,224

Foreign Currency Transactions

     (101     (1,248
  

 

 

   

 

 

 

Net Realized Gain (Loss)

     (21,346,653)       (7,576,472
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

     (9,700,162     (5,200,728
  

 

 

   

 

 

 

Dividends from Net Investment Income

     (6,093,604     (8,613,072

Return of Capital

     (1,051,922     (1,031,916
  

 

 

   

 

 

 

Net Decrease in Net Assets Resulting from Distributions

     (7,145,526     (9,644,988
  

 

 

   

 

 

 

Capital Share Transactions:

    

Repurchase of Common Stock Under Share Repurchase Program

     (2,422,384     —    

Issuance of Common Stock

     —         43,246,786  

Less Offering Costs and Underwriting Fees

     —         (1,442,780
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

     (2,422,384     41,804,006  
  

 

 

   

 

 

 

Total Increase (Decrease) in Net Assets

     (19,268,072     26,958,290  

Net Assets at Beginning of Year

     99,938,567       72,980,277  
  

 

 

   

 

 

 

Net Assets at End of Year

   $ 80,670,495     $ 99,938,567  
  

 

 

   

 

 

 

Capital Share Activity:

    

Shares Repurchased Under Share Repurchase Program

     (763,187     —    

Shares Issued

     —         11,792,396  

Shares Outstanding at Beginning of Year

     23,235,430       11,443,034  
  

 

 

   

 

 

 

Shares Outstanding at End of Year

     22,472,243       23,235,430  
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended
June 30, 2016
    Year Ended
June 30, 2015
 

Cash Flows from Operating Activities:

    

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (9,700,162   $ (5,200,728

Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash Provided by (Used in) Operating Activities

    

Purchases of Investments

     (96,437,681     (136,691,882

Increase in Investments Due to PIK

     (291,992     (429,720

Proceeds from Sale or Refinancing of Investments and Open Swap Contract

     153,241,487       122,880,572  

Net Realized (Gain) Loss on:

    

Investments and Open Swap Contract

     21,346,552       7,575,224  

Foreign Currency Transactions

     101       1,248  

Net Change in Unrealized (Gain) Loss on Investments

     (5,355,642     6,237,328  

Amortization and Accretion of Fixed Income Premiums and Discounts

     (1,511,281     (1,496,851

Amortization and Accretion of Deferred Debt Issuance Premiums and Costs

     135,489       129,066  

Amortization of Deferred Credit Facility Fees

     282,278       274,826  

Write-off of Deferred Operating Expenses

     320,910       —    

Change in Operating Assets and Liabilities

    

Deposit with Broker

     —         2,525,000  

Interest Receivable

     909,641       (886,880

Principal Receivable

     (103,161     183,946  

Distributions Receivable

     15,141       (15,141

Due from Affiliates

     605,749       (601,476

Due from Portfolio Investments

     86,850       (45,012

Receivable on Open Swap Contract

     1,081       —    

Prepaid Expenses

     (44     (8,635

Other Assets

     1,468,292       (733,252

Due to Affiliates

     (663,524     160,523  

Accrued Liabilities

     1,306,677       (5,479

Deposit from Swap Counterparty

     (10,380,000     10,380,000  

Due to Broker

     —         (25,000,221

Payable for Investments Acquired

     (15,020,000     (9,880,172

Interest Payable

     (53,716     12,351  

Other Liabilities

     (101,644     (770,843
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     40,101,401       (31,406,208
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-75


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

     Year Ended
June 30, 2016
    Year Ended
June 30, 2015
 

Cash Flows from Financing Activities:

    

Bank Overdraft

     —         (821,316

Borrowings Under Credit Facility

     101,505,921       200,789,889  

Payments Under Credit Facility

     (101,505,921     (209,225,352

Distributions Paid to Shareholders

     (7,958,766     (9,598,431

Deferred Credit Facility Fees

     (66,119     (93,121

Payment of Offering Expenses and Underwriting Fees

     —         (1,799,518

Payment of Distribution Notes

     —         —    

Proceeds from Notes Payable

     —         12,643,834  

Proceeds from Issuance of Common Stock

     —         43,246,786  

Payment for Repurchase of Common Stock Under Share Repurchase Program

     (2,422,384     —    
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Financing Activities

     (10,447,269     35,142,771  
  

 

 

   

 

 

 

Total Increase (Decrease) in Cash

     29,654,132       3,736,563  

Cash Balance at Beginning of Year

     3,736 ,563       —    
  

 

 

   

 

 

 

Cash Balance at End of Year

   $ 33,390,695     $ 3,736,563  
  

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Operating Activities:

    

Exercise of General Cannabis Corp. Warrant into Common Stock

   $ —       $ 486,786  

Supplemental Disclosures of Non-Cash Financing Activities:

    

Distributions Declared, Not Yet Paid

   $ —       $ 813,240  

Accrued Offering Expenses

   $ —       $ 7,258  

Supplemental Disclosure of Cash Flow Information:

    

Cash Paid During the Period for Interest

   $ 3,435,900     $ 3,889,315  

 

See notes to consolidated financial statements.

 

F-76


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2016

 

Description and
Industry (1)

 

Type of Investment (2)

  Par Amount/
Quantity
    Cost     Fair Value     % of Net
Asset Value
 

Control Investments (3)

         

Texas Westchester Financial, LLC

Consumer Financing

 

Limited Liability

Company Interests ^

    9,278     $ 314,312     $ 100,000       0.12
     

 

 

   

 

 

   

 

 

 

Total Control Investments

        314,312       100,000       0.12
     

 

 

   

 

 

   

 

 

 

Affiliate Investments (4)

         

US Oilfield Company, LLC

Oil and Gas Field Services

  Senior Secured Revolving Loan, 12.47% (one month LIBOR plus 12.00%), 12/31/2017 (5)   $ 186,624       186,624       10,137       0.01
  Senior Secured Term Loan A, 12.47% (one month LIBOR plus 12.00%), 12/31/2017 (5)   $ 861,728       856,358       46,809       0.06
  Senior Secured Term Loan B, 12.47% (one month LIBOR plus 12.00%), 12/31/2017 (5)   $ 4,720,391       4,684,943       256,409       0.32
  Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024 ^     1       —         —         —  
  Warrants for 4.788% of the outstanding Class B non-voting LLC interests (strike price $0.01), expire 8/13/2024 ^     4       —         —         —  
     

 

 

   

 

 

   

 

 

 
        5,727,925       313,355       0.39
     

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

        5,727,925       313,355       0.39
     

 

 

   

 

 

   

 

 

 
Other Investments                            

310E53RD, LLC

Real Estate Holding Company

  Senior Secured Term Loan, 10.47% (one month LIBOR plus 10.00%, 10.15% floor, 16.00% cap) 7/1/2017   $ 6,000,000       5,935,776       6,000,000       7.44

Ads Direct Media, Inc.

Internet Advertising

  Senior Secured Term Loan, 12.00% 5/2/2018, (5)   $ 2,072,539       1,885,195       1,115,711       1.38
  Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024 ^     1       —         —         —  
     

 

 

   

 

 

   

 

 

 
        1,885,195       1,115,711       1.38
     

 

 

   

 

 

   

 

 

 

AP Gaming I, LLC

Gambling Machine Manufacturer

  Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020   $ 3,949,367       3,915,675       3,712,405       4.60

Aptean, Inc

Enterprise Software Company

  Unfunded Revolving Loan, 4.22% (one month LIBOR plus 3.75%) (purchased with an 11.00% netback), 2/26/2019 (6)   $ 7,500,000       (696,402     (640,152     (0.79 )% 

Attention Transit Advertising Systems, LLC

Outdoor Advertising Services

  Senior Secured Term Loan, 11.50%, 9/30/2016   $ 1,683,179       1,683,179       1,784,058       2.21

Background Images, Inc.

Equipment Rental Services

  Senior Secured Term Loan—Term A, 14.97% (one month LIBOR plus 14.50%), 9/1/2016 (5)   $ 121,127       121,127       146,128       0.18
  Senior Secured Term Loan—Term B, 16.72% (one month LIBOR plus 16.25%), 9/1/2016 (5)   $ 446,465       446,465       471,467       0.59
     

 

 

   

 

 

   

 

 

 
        567,592       617,595       0.77
     

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-77


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2016

 

Description and
Industry (1)

 

Type of Investment (2)

  Par Amount/
Quantity
    Cost     Fair Value     % of Net
Asset Value
 

Other Investments (continued)

         

Bioventus, LLC

Specialty Pharmaceuticals

  Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020   $ 6,000,000     $ 5,954,883     $ 6,000,000       7.44

Davidzon Radio, Inc.

Radio Broadcasting

  Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020   $

 

10,334,155

 

 

 

   

 

8,809,981

 

 

 

   

 

9,650,035

 

 

 

   

 

11.96

 

 

GC Pivotal, LLC

Data Connectivity Services Company

  Unsecured Notes, 11.00%, 12/31/2020   $ 3,164,000       3,170,905       3,096,712       3.84

Infinite Aegis Group, LLC

Healthcare Billing and Collections

  Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023 ^    

 

1

 

 

 

   

 

107,349

 

 

 

   

 

—  

 

 

 

   

 

—  

 

 

JN Medical Corporation

Biological Products

  Senior Secured Term Loan, 16.47%, (one month LIBOR plus 16.00%, 11.25% floor, 12.00% cap), 6/30/2016 (5),(9)   $ 3,500,000       3,500,000       3,249,213       4.03

Luling Lodging, LLC

Hotel Operator

  Senior Secured Term Loan, 12.47% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017 (8)   $ 4,500,000       4,476,382       3,053,505       3.79

Modular Process Control, LLC

Energy Efficiency Services

  Unsecured Loan, 5.00%, 4/1/2025 (5)   $ 800,000       800,000       —         —  

OPS Acquisitions Limited and Ocean Protection Services Limited*

Maritime Security Services

  Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017   $

 

4,596,293

 

 

 

   

 

4,490,547

 

 

 

   

 

4,449,058

 

 

 

   

 

5.52

 

 

PEAKS Trust 2009-1*

Consumer Financing

  Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020 (10)   $

 

2,129,426

 

 

 

   

 

1,873,367

 

 

 

   

 

1,787,014

 

 

 

   

 

2.21

 

 

PR Wireless, Inc.

Wireless Communications

  Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020   $ 8,330,000       7,756,435       7,497,000       9.29
  Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024 ^     1       634,145       209,844       0.26
     

 

 

   

 

 

   

 

 

 
        8,390,580       7,706,844       9.55
     

 

 

   

 

 

   

 

 

 

Pristine Environments, Inc.

Building Cleaning and Maintenance Services

  Senior Secured Revolving Loan, 14.97% (one month LIBOR plus 14.50%, 11.70% floor), 3/31/2017   $

 

5,990,807

 

 

 

   

 

5,990,807

 

 

 

   

 

5,990,807

 

 

 

   

 

7.42

 

 

  Senior Secured Term Loan A, 15.97% (one month LIBOR plus 15.50%, 12.70% floor), 3/31/2017   $ 1,515,546       1,513,330       1,515,546       1.88
  Senior Secured Term Loan B, 15.97% (one month LIBOR plus 15.50%, 12.70% floor), 3/31/2017   $ 2,848,423       2,828,824       2,845,575       3.53
     

 

 

   

 

 

   

 

 

 
        10,332,961       10,351,928       12.83
     

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-78


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2016

 

Description and Industry (1)

  

Type of Investment (2)

  Par Amount/
Quantity
    Cost     Fair Value     % of Net
Asset Value
 

Other Investments
(continued)

          

RiceBran Technologies Corporation

Grain Mill Products

   Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018   $ 1,958,382     $ 1,916,188     $ 1,889,838       2.34
   Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018   $ 1,500,000       1,435,956       1,452,500       1.80
   Warrants for 300,000 shares (at a $1.85 strike price), expire 5/12/2020 ^     300,000       39,368       110,905       0.14
      

 

 

   

 

 

   

 

 

 
         3,391,512       3,453,243       4.28
      

 

 

   

 

 

   

 

 

 

Sundberg America, LLC et al.

Appliance Parts Distributor

   Senior Secured Notes, 9.50%, 4/30/2020   $ 7,278,684       7,247,922       7,278,684       9.02

The Finance Company, LLC

Consumer Financing

   Senior Secured Revolving Loan, 13.25% (one month LIBOR plus 12.75%, 13.25% floor), 3/31/2018   $ 1,841,325       1,841,325       1,848,752       2.29

The Selling Source, LLC

Information and Data Services

   Senior Secured Term Loan, 17.00%, 12/31/2017**   $ 4,924,966       4,132,707       3,965,090       4.92

US Shale Solutions, Inc.

Oil and Gas Field Services

   Senior Secured Term Loan, 10.00%, 9/15/2018**   $ 1,084,337       1,084,337       1,059,036       1.31
   Subordinated Secured Term Loan, 12.00%, 9/15/2019**   $ 2,584,968       2,584,968       1,170,129       1.45
   Limited Liability Company Interests (7), ^     15,079       4,325,739       —         —  
      

 

 

   

 

 

   

 

 

 
         7,995,044       2,229,165       2.76
      

 

 

   

 

 

   

 

 

 
Total Other Investments       89,806,480       80,708,860       100.05
      

 

 

   

 

 

   

 

 

 
Total Investments     $ 95,848,717     $ 81,122,215       100.56
      

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-79


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2016

 

The following tables show the fair value of our portfolio of investments by geography and industry as of June 30, 2016.

 

     June 30, 2016  

Geography

   Investment at
Fair Value
(in millions)
     Percentage of
Net Assets
 

United States

   $ 76.7        95.04

United Kingdom

     4.4        5.52  
  

 

 

    

 

 

 

Total

   $ 81.1        100.56
  

 

 

    

 

 

 

 

     June 30, 2016  

Industry

   Investment at
Fair Value
(in millions)
     Percentage of
Net Assets
 

Building Cleaning and Maintenance Services

   $ 10.4        12.83

Radio Broadcasting

     9.7        11.96  

Wireless Communications

     7.6        9.55  

Appliance Parts Distributor

     7.3        9.02  

Real Estate Holding Company

     6.0        7.44  

Specialty Pharmaceuticals

     6.0        7.44  

Maritime Security Services

     4.4        5.51  

Information and Data Services

     4.0        4.92  

Consumer Financing

     3.7        4.63  

Gambling Machine Manufacturer

     3.7        4.60  

Grain Mill Products

     3.5        4.28  

Biological Products

     3.2        4.03  

Data Connectivity Service Company

     3.1        3.84  

Hotel Operator

     3.1        3.79  

Oil and Gas Field Services

     2.5        3.15  

Outdoor Advertising Services

     1.8        2.21  

Internet Advertising

     1.1        1.38  

Equipment Rental Services

     0.6        0.77  

Healthcare Billing and Collections

     —          —    

Energy Efficiency Services

     —          —    

Enterprise Software Company

     (0.6      (0.79
  

 

 

    

 

 

 

Total

   $ 81.1        100.56
  

 

 

    

 

 

 

 

(1)  

The Company’s investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act of 1933.

(2)  

A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (“London Interbank Offered Rate”) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the

 

See notes to consolidated financial statements.

 

F-80


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2016

 

  interest rate in effect as of June 30, 2016. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
(3)  

“Control Investments” are investments in those companies that are “Control Investments” of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a “Control Investment” of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company.

(4)  

“Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the Investment Company Act of 1940, which are not “Control Investments.” A company is deemed to be an “Affiliate” of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company.

(5)  

Investments were on non-accrual status as of June 30, 2016.

(6)  

The negative fair value is the result of the unfunded commitment being valued below par. These amounts may or may not be funded to the borrowing party now or in the future. The cost basis of the loan reflects the unamortized portion of the “netback” received on the settlement date when the Company acquired the commitment. The par value disclosure represents the size of the commitment.

(7)  

Full Circle Capital Corporation’s equity investment in US Shale Solutions, Inc. is held through its wholly owned subsidiary FC Shale Inc.

(8)  

Investment is on non-accrual status as of July 19, 2016.

(9)  

On August 17, 2016, the Company foreclosed on the commercial property underlying its loan to JN Medical Corporation (“JNI”). Subsequent to the foreclosure, on September 14, 2016 the Company entered into a forbearance agreement with JNI, which among other things, required JNI to enter into a triple net lease agreement with respect to the commercial property and to fund an initial payment of $730,723 to the Company in addition to resuming all other obligations under the loan agreement.

(10)  

The Company holds collateralized note obligations from PEAKS Trust 2009-1. ITT Educational Services Inc. (“ITT”) has guaranteed payment on these notes. On August 26, 2016, ITT announced that it would no longer be accepting new students for enrollment during the current academic year. Subsequently ITT terminated operations at its campuses and on September 16, 2016 ITT filed for Chapter 7 bankruptcy. To the degree that ITT has liabilities in excess of the proceeds resulting from the Chapter 7 proceedings, ITT may not be able to meet obligations under its guarantee, which could impair the value of the notes. At August 31, 2016, the Company valued the notes at 70.91% of par value as compared to 83.92% of par value at June 30, 2016. The Company is currently reviewing the situation, but does not expect a significant change in the value of the notes due to the status of ITT.

*

Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 5.3% are non-qualifying assets.

**

Security pays all or a portion of its interest in kind.

^

Security is a nonincome-producing security.

 

See notes to consolidated financial statements.

 

F-81


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

June 30, 2015

 

Description and

Industry (1)         

 

Type of Investment (2)

  Par
Amount/
Quantity
    Cost     Fair Value     % of Net
Asset Value
 
Control Investments (3)        

Takoda Resources Inc.*

Geophysical Surveying and Mapping Services

  Senior Secured Term Loan, 16.00%, 4/1/2016 (9)   $ 3,054,532     $ 3,054,532     $ 161,585       0.16
  Common Stock ^,(5)     749       —         —         —  
     

 

 

   

 

 

   

 

 

 
        3,054,532       161,585       0.16
     

 

 

   

 

 

   

 

 

 

Texas Westchester Financial, LLC

Consumer Financing

  Limited Liability Company Interests ^     9,278       491,713       177,500       0.18

The Finance Company, LLC

Consumer Financing

  Senior Secured Term Loan, 15.00% (one month LIBOR plus 14.25%, 15.00% floor), 9/30/2015   $ 4,195,915       4,187,977       4,204,167       4.21
  Limited Liability Company Interests     50       140,414       802,027       0.80
     

 

 

   

 

 

   

 

 

 
        4,328,391       5,006,194       5.01
     

 

 

   

 

 

   

 

 

 

TransAmerican Asset Servicing Group, LLC

Asset Recovery Services

  Senior Secured Revolving Loan, 12.00%, 7/25/2016 (9)   $ 3,563,246       3,534,960       466,785       0.47
  Limited Liability Company Interests ^,(6)     75       —         —         —  
     

 

 

   

 

 

   

 

 

 
        3,534,960       466,785       0.47
     

 

 

   

 

 

   

 

 

 
Total Control Investments       11,409,596       5,812,064       5.82
     

 

 

   

 

 

   

 

 

 
Affiliate Investments (4)          

Modular Process Control, LLC

Energy Efficiency Services

  Senior Secured Revolving Loan, 14.50% (one month LIBOR plus 13.50%, 14.50% floor), 3/28/2017   $ 1,297,884       1,294,200       1,175,320       1.18
  Senior Secured Term Loan, 15.50% (one month LIBOR plus 14.50%, 15.50% floor), 3/28/2017   $ 4,900,000       4,743,125       2,296,957       2.30
  Senior Secured Term Loan—Tranche 2, 18.00% (one month LIBOR plus 17.00%, 18.00% floor), 3/28/2017**   $ 953,143       953,143       191,550       0.19
  Warrant for 14.50% of the outstanding Class B LLC Interests (at a $0.01 strike price), expires 3/28/2023 ^     1       288,000       —         —  
     

 

 

   

 

 

   

 

 

 
        7,278,468       3,663,827       3.67
     

 

 

   

 

 

   

 

 

 

ProGrade Ammo Group, LLC

Munitions

  Senior Secured Revolving Loan, 9.19% (one month LIBOR plus 9.00%, 9.19% floor), 3/30/2016 (9)   $ 1,821,447       1,821,447       1,821,447       1.82
  Senior Secured Term Loan, 16.19% (one month LIBOR plus 16.00%, 16.19% floor), 3/30/2016 (9)   $ 4,843,750       4,843,750       768,862       0.77
  Warrants for 19.9% of the outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018 ^     181,240       176,770       —         —  
     

 

 

   

 

 

   

 

 

 
        6,841,967       2,590,309       2.59
     

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-82


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

Description and Industry (1)

 

Type of Investment (2)

  Par
Amount/
Quantity
    Cost     Fair Value     % of Net Asset
Value
 

Affiliate Investments (4) (continued)

         

SOLEX Fine Foods, LLC; Catsmo, LLC

Food Distributors and Wholesalers

  Senior Secured Term Loan, 12.33% (one month LIBOR plus 12.14%), 12/28/2016   $ 3,861,696     $ 3,814,813     $ 3,832,347       3.83
  Limited Liability Company
Interests ^,(7)
    1       290,284       —         —  
  Warrants for 1.6% of the outstanding LLC interests (strike price $0.01), expire 12/31/2022 ^,(7)     1       58,055       —         —  
       

 

 

   

 

 

   

 

 

 
        4,163,152       3,832,347       3.83
       

 

 

   

 

 

   

 

 

 

US Oilfield Company, LLC

Oil and Gas Field Services

  Senior Secured Revolving Loan, 12.69% (one month LIBOR plus 12.50%), 8/13/2017   $ 545,118       545,118       545,118       0.55
  Senior Secured Term Loan A, 12.69% (one month LIBOR plus 12.50%), 8/13/2017   $ 854,167       847,155       840,415       0.84
  Senior Secured Term Loan B, 12.69% (one month LIBOR plus 12.50%), 8/13/2017   $ 4,368,132       4,328,366       4,297,805       4.30
  Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024 ^     1       —         —         —  
  Warrants for 1.824% of the outstanding Class B non-voting LLC interests (strike price $0.01), expires 8/13/2024 ^     2       —         —         —    
     

 

 

   

 

 

   

 

 

 
        5,720,639       5,683,338       5.69
     

 

 

   

 

 

   

 

 

 

West World Media, LLC

Information and Data Services

  Limited Liability Company
Interests ^,(8)
    148,326       430,500       249,451       0.25
         
     

 

 

   

 

 

   

 

 

 
Total Affiliate Investments       24,434,726       16,019,272       16.03
     

 

 

   

 

 

   

 

 

 
Other Investments                            

Ads Direct Media, Inc.

Internet Advertising

  Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.00%, 13.50% floor) 10/9/2017   $ 2,406,250       2,387,763       2,392,294       2.39
  Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024 ^     1       —         —         —  
     

 

 

   

 

 

   

 

 

 
        2,387,763       2,392,294       2.39
     

 

 

   

 

 

   

 

 

 

AP Gaming I, LLC

Gambling Machine Manufacturer

  Unfunded Revolving Loan, 8.25%, 12/20/2018 (10)   $ —         (146,988     (146,988     (0.15 )% 
  Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020   $ 3,989,873       3,950,167       3,950,167       3.95
     

 

 

   

 

 

   

 

 

 
        3,803,179       3,803,179       3.80
     

 

 

   

 

 

   

 

 

 

Attention Transit Advertising Systems, LLC

Outdoor Advertising Services

  Senior Secured Term Loan, 11.50%, 9/30/2016   $ 1,915,341       1,915,341       1,979,058       1.98

 

See notes to consolidated financial statements.

 

F-83


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

Description and

Industry (1)         

 

Type of Investment (2)

  Par
Amount/
Quantity
    Cost     Fair Value     % of Net
Asset Value
 

Other Investments (continued)

         

Background Images, Inc.

Equipment Rental Services

  Senior Secured Term Loan—Term A, 14.69% (one month LIBOR plus 14.50%), 7/31/2015   $ 132,866     $ 132,866     $ 146,525       0.15
  Senior Secured Term Loan—Term B, 16.44% (one month LIBOR plus 16.25%), 7/31/2015   $ 485,725       485,725       493,449       0.49
     

 

 

   

 

 

   

 

 

 
        618,591       639,974       0.64
     

 

 

   

 

 

   

 

 

 

Bioventus, LLC

Specialty Pharmaceuticals

  Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020   $ 6,000,000       5,944,426       5,970,000       5.97

Butler Burgher Group, LLC

Real Estate Management Services

  Senior Secured Revolving Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017   $ 750,000       745,237       800,000       0.80
  Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017   $ 7,349,264       7,302,515       7,716,728       7.72
     

 

 

   

 

 

   

 

 

 
        8,047,752       8,516,728       8.52
     

 

 

   

 

 

   

 

 

 

Davidzon Radio, Inc .

Radio Broadcasting

  Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020   $ 10,897,013       8,991,089       9,262,098       9.27

Fuse, LLC

Television Programming

  Senior Secured Note, 10.375%, 7/1/2019   $ 7,000,000       7,041,962       5,775,000       5.78

GC Pivotal, LLC

Data Connectivity Services Company

  Unsecured Notes, 11.00%, 12/31/2020   $ 3,164,000       3,171,910       3,171,910       3.17

General Cannabis Corp.

Non-Residential Property Owner

  Common Stock ^     654,409       515,094       1,308,818       1.31

GK Holdings Inc.

IT and Business Skill Training

  Subordinated Secured Term Loan, 10.50% (one month LIBOR plus 9.50%, 10.50% floor), 1/20/2022   $ 2,000,000       1,962,074       1,980,000       1.98

Good Technology Corporation

Mobile Device Management

  Senior Secured Note, 5.00%, 10/1/2017   $ 10,000,000       8,201,173       8,845,667       8.85
  Warrants for 203.252 shares (at a $4.92 strike price), expire 9/30/2018 ^     10,000       2,289,400       2,289,400       2.29
     

 

 

   

 

 

   

 

 

 
        10,490,573       11,135,067       11.14
     

 

 

   

 

 

   

 

 

 

Granite Ridge Energy, LLC

Power Generation

  Common Stock ^     60,000       12,975,000       12,975,000       12.98

GW Power, LLC and Greenwood Fuels WI, LLC

Electric Services

  Senior Secured Term Loan, 12.19% (one month LIBOR plus 12.00%, 12.16% floor), 3/31/2016   $ 5,320,388       5,299,835       5,255,480       5.26

Infinite Aegis Group, LLC

Healthcare Billing and Collections

  Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023 ^     1       107,349       —         —  

 

See notes to consolidated financial statements.

 

F-84


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

Description and Industry (1)

 

Type of Investment (2)

  Par
Amount/
Quantity
    Cost     Fair Value     % of Net Asset
Value
 

Other Investments (continued)

         

JN Medical Corporation

Biological Products

  Senior Secured Term Loan, 11.25%, (one month LIBOR plus 11.00%, 11.25% floor, 12.00% cap), 6/30/2016   $ 3,500,000     $ 3,481,766     $ 3,449,367       3.45

Lee Enterprises, Incorporated

Daily and Weekly Newspaper Publisher

  Senior Secured Notes, 9.50%, 3/15/2022   $ 2,000,000       2,045,000       2,045,000       2.05

Luling Lodging, LLC

Hotel Operator

  Senior Secured Term Loan, 12.25% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017   $ 4,500,000       4,463,119       4,303,650       4.31

Medinet Investments, LLC

Medical Liability Claims Factoring

  Senior Secured Revolving Loan, 13.50%, (one month LIBOR plus 13.00%, 13.50% floor), 7/23/2017   $ 188,313       183,211       103,083       0.10

New Media West, LLC

Cable TV/Broadband Services

  Senior Secured Term Loan, 9.00%, 12/31/2017 (9)   $ 3,811,681       3,811,681       —         —  

OPS Acquisitions Limited and Ocean Protection Services Limited*

Maritime Security Services

  Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017   $ 5,950,000       5,913,412       5,968,246       5.97

PEAKS Trust 2009-1*

Consumer Financing

  Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020   $ 3,450,828       2,947,443       2,705,449       2.71

PR Wireless, Inc.

Wireless Communications

  Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020   $ 8,415,000       7,618,897       7,573,500       7.58
  Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024 ^     1       634,145       378,675       0.38
     

 

 

   

 

 

   

 

 

 
        8,253,042       7,952,175       7.96
     

 

 

   

 

 

   

 

 

 

Pristine Environments, Inc.

Building Cleaning and Maintenance Services

  Senior Secured Revolving Loan, 11.70% (one month LIBOR plus 11.50%, 11.70% floor), 3/31/2017   $ 5,614,310       5,614,310       5,863,211       5.87
  Senior Secured Term Loan A, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017   $ 1,607,656       1,602,678       1,685,037       1.69
  Senior Secured Term Loan B, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017   $ 3,026,563       2,979,285       3,172,039       3.17
     

 

 

   

 

 

   

 

 

 
        10,196,273       10,720,287       10.73
     

 

 

   

 

 

   

 

 

 

RiceBran Technologies Corporation

Grain Mill Products

  Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018   $ 1,000,000       939,362       939,362       0.94
  Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018   $ 2,500,000       2,348,330       2,348,330       2.35
  Warrants for 300,000 (at a $5.25 strike price), expires 5/12/2020 ^     300,000       39,368       27,000       0.03
     

 

 

   

 

 

   

 

 

 
          3,327,060       3,314,692       3.32
     

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

F-85


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

Description and

Industry (1)         

 

Type of Investment (2)

  Par
Amount/
Quantity
    Cost     Fair Value     % of Net
Asset
Value
 

Other Investments (continued)

         

Sundberg America,
LLC et al.

Appliance Parts Distributor

 

Senior Secured Notes, 9.50%, 4/30/2020

  $ 8,000,000     $ 7,960,112     $ 7,960,112       7.97

The Selling Source, LLC

Information and Data Services

 

Senior Secured Term Loan, 15.00%, 12/31/2017**

  $ 3,869,881       3,855,453       3,140,666       3.14

US Shale Solutions, Inc.

Oil and Gas Field Services

 

Senior Secured Note, 12.50%, 9/1/2017 (9)

  $ 9,000,000       6,641,957       4,455,000       4.46
 

Warrants for 2.78 shares (at a $0.01 strike price), expire 9/1/2024 ^

    9,000       114       90       0.00
     

 

 

   

 

 

   

 

 

 
        6,642,071       4,455,090       4.46
     

 

 

   

 

 

   

 

 

 
Total Other Investments       136,351,581       130,282,423       130.36
     

 

 

   

 

 

   

 

 

 
Total Investments     $ 172,195,903     $ 152,113,759       152.21
     

 

 

   

 

 

   

 

 

 

 

Counterparty

 

Instrument

  # of
Contracts
    Notional     Cost     Fair
Value
    % of
Net
Asset
Value
 

Open Swap Contract

           

Reef Road Master Fund, Ltd.

 

Total Return Swap, Pay Total Return on 60,000 shares of Granite Ridge Energy, LLC, Receive 3.00% Fixed Rate, expires June 29, 2016

    1     $ 12,975,000     $ —       $ —         —  

The following tables show the fair value of our portfolio of investments by geography and industry as of June 30, 2015.

 

     June 30, 2015  

Geography

   Investment at
Fair Value
(in millions)
     Percentage of
Net Assets
 

United States

   $ 145.9        146.08

United Kingdom

     6.0        5.97  

Canada

     0.2        0.16  
  

 

 

    

 

 

 

Total

   $ 152.1        152.21
  

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

F-86


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

     June 30, 2015  

Industry

   Investment at
Fair Value
(in millions)
     Percentage of
Net Assets
 

Power Generation

   $ 13.0        12.98

Mobile Device Management

     11.1        11.14  

Building Cleaning and Maintenance Services

     10.7        10.73  

Oil and Gas Field Services

     10.1        10.14  

Radio Broadcasting

     9.3        9.27  

Real Estate Management Services

     8.5        8.52  

Appliance Parts Distributor

     8.0        7.97  

Wireless Communications

     8.0        7.96  

Consumer Financing

     7.9        7.90  

Specialty Pharmaceuticals

     6.0        5.97  

Maritime Security Services

     6.0        5.97  

Television Programming

     5.8        5.78  

Electric Services

     5.2        5.26  

Hotel Operator

     4.3        4.31  

Food Distributors and Wholesalers

     3.8        3.83  

Gambling Machine Manufacturer

     3.8        3.81  

Energy Efficiency Services

     3.6        3.67  

Biological Products

     3.4        3.45  

Information and Data Services

     3.4        3.39  

Grain Mill Products

     3.3        3.32  

Data Connectivity Service Company

     3.2        3.17  

Munitions

     2.6        2.59  

Internet Advertising

     2.4        2.39  

Daily and Weekly Newspaper Publisher

     2.0        2.05  

IT and Business Skill Training

     2.0        1.98  

Outdoor Advertising Services

     2.0        1.98  

Non-Residential Property Owner

     1.3        1.31  

Equipment Rental Services

     0.6        0.64  

Asset Recovery Services

     0.5        0.47  

Geophysical Surveying and Mapping Services

     0.2        0.16  

Medical Liability Claims Factoring

     0.1        0.10  

Cable TV/Broadband Services

     —          —    
  

 

 

    

 

 

 

Total

   $ 152.1        152.21
  

 

 

    

 

 

 

 

(1)  

The Company’s investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act of 1933.

(2)  

A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (“London Interbank Offered Rate”) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2015. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.

(3)  

“Control Investments” are investments in those companies that are “Control Investments” of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a “Control Investment” of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company.

 

See notes to consolidated financial statements.

 

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Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

June 30, 2015

 

(4)  

“Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the Investment Company Act of 1940, which are not “Control Investments.” A company is deemed to be an “Affiliate” of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company.

(5)  

Full Circle Capital Corporation’s equity investment in Takoda Resources Inc. is held through its wholly owned subsidiary FC Takoda Holdings, LLC.

(6)  

Full Circle Capital Corporation’s equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly owned subsidiary TransAmerican Asset Servicing Group, Inc.

(7)  

Full Circle Capital Corporation’s equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly owned subsidiary FC New Specialty Foods, Inc.

(8)  

A portion of Full Circle Capital Corporation’s investment in West World Media, LLC is held through its wholly owned subsidiary Full Circle West, Inc. The remainder of the LLC interests are held directly by Full Circle Capital Corporation.

(9)  

Investments were on non-accrual status as of June 30, 2015.

(10)  

The negative fair value is the result of the unfunded commitment being valued below par. These amounts may or may not be funded to the borrowing party now or in the future.

*

Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets.

**

Security pays all or a portion of its interest in kind.

^

Security is a nonincome-producing security.

 

See notes to consolidated financial statements.

 

F-88


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 1. Organization

References herein to “we”, “us” or “our” refer to Full Circle Capital Corporation and Subsidiaries (“Full Circle Capital” or the “Company”) unless the context specifically requires otherwise.

We were formed as Full Circle Capital Corporation, a Maryland corporation, on April 16, 2010 and were funded in an initial public offering, or IPO, completed on August 31, 2010. We are a non-diversified, closed-end investment company that has filed an election to be regulated as a business development company, or BDC, under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we have elected to be treated, and expect to continue to qualify annually, as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. We invest primarily in senior secured term debt issued by lower middle-market and middle-market companies. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.

Note 2. Significant Accounting Policies

Use of Estimates and Basis of Presentation

The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reporting period. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ materially.

Reclassifications

The June 30, 2015 Consolidated Financial Statements were reclassified in order to conform with the June 30, 2016 Consolidated Financial Statements.

Upon the adoption of Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) effective January 1, 2016, debt issuance costs associated with our borrowings, other than our revolving credit facilities, were reclassified as a direct deduction from the carrying amount of the related borrowing. In accordance with ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June  18, 2015 EITF Meeting , debt issuance costs associated with our revolving credit facilities remain classified as an asset, regardless of whether there are any outstanding borrowings on the facility.

Investment Classification

We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60

 

F-89


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright, or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities owned by another company or person.

Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments in other, non-security financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled are reported as receivables for investments sold and payables for investments acquired, respectively, in the Consolidated Statements of Assets and Liabilities.

Basis of Consolidation

Under the 1940 Act and the rules thereunder, the rules and regulations pursuant to Article 6 of Regulation S-X, the SEC’s Division of Investment Management’s consolidation guidance in IM Guidance Update No. 2014-11 issued in October 2014 and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services-Investment Companies (“ASC 946”), we are precluded from consolidating any entity other than another investment company that acts as an extension of our investment operations and facilitates the execution of our investment strategy. An exception to this guidance occurs if we have an investment in a controlled operating company that provides substantially all of its services to us. Our Consolidated Financial Statements include our accounts and the accounts of Full Circle West, Inc., FC New Media, Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., FC Shale Inc., and FC Takoda Holdings, LLC, our currently wholly owned, or previously wholly owned, subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Valuation of Investments

In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers or market makers. Debt and equity securities for which market quotations are not readily available or are not considered to be the best estimate of fair value are valued at fair value as determined in good faith by the Company’s board of directors (the “Board”). Because the Company expects that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Board in accordance with a documented valuation policy that has been reviewed and approved by the Board and in accordance with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ

 

F-90


Table of Contents
Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

In determining fair value, the Board uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board. Unobservable inputs reflect the Board’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the “Audit Committee”), does not represent fair value, are valued as follows:

 

  1.

The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals at Full Circle Advisors, LLC (the “Adviser”) who are responsible for the portfolio investment;

 

  2.

Preliminary valuation conclusions are then documented and discussed with the Company’s senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct independent appraisals or review management’s preliminary valuations or make their own independent assessment, for certain assets;

 

  3.

The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and

 

  4.

The Board then discusses the recommended valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Company’s senior management, estimates from the independent valuation firms and the recommendations of the Audit Committee.

GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

 

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June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of valuation techniques and observable inputs can vary from investment to investment and is affected by a wide variety of factors, including the type of investment, whether the investment is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for investments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause an investment to be reclassified to a lower level within the fair value hierarchy.

Valuation Techniques

Senior and Subordinated Loans

The Company’s portfolio consists primarily of private debt instruments such as senior and subordinated loans. Investments for which market quotations are readily available (“Level 2 Debt”) are generally valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers. For other debt investments (“Level 3 Debt”), market quotations are not available and other techniques are used to determine fair value. The Company considers its Level 3 Debt to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner, the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 Debt, the Board considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions, success and prepayment fees, and other relevant factors, both qualitative and quantitative. In the event that a Level 3 Debt instrument is not performing, as defined above, the Board may evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 Debt instrument.

 

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June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

This evaluation will be updated no less than quarterly for Level 3 Debt instruments that are not performing, and more frequently for time periods where there are significant changes in the investor base or significant changes in the perceived value of the underlying collateral. The collateral value will be analyzed on an ongoing basis using internal metrics, appraisals, third-party valuation agents and other data as may be acquired and analyzed by management and the Board.

Investments in Private Companies

The Board determines the fair value of its investments in private companies where no market quotations are readily available (“Level 3 Private Companies”) by incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, and performance multiples, among other factors, including work performed by third-party valuation agents. The Level 3 Private Companies investments can include limited liability company interests, common stock and other equity investments. These nonpublic investments are included in Level 3 of the fair value hierarchy.

Warrants

The Board ascribes value to warrants based on fair value analyses that can include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.

Publicly Traded Common Stock

Publicly traded common stock in an active market (“Level 1 Common Stock”) is valued based on unadjusted quoted prices in active markets for identical Level 1 Common Stock that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 Common Stock.

Swap Contracts

Derivative financial instruments such as swap contracts are valued based on discounted cash flow models and options pricing models, as appropriate. Models use observable data to the extent practicable. However, areas such as credit risk (both our own and that of the counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of derivative financial instruments at the valuation date.

The Company’s accounting policy is to not offset fair value amounts recognized for derivative financial instruments. The related assets and liabilities are presented gross in the Consolidated Statements of Assets and Liabilities. Any cash collateral payables or receivables associated with these instruments are not added to or netted against the fair value amounts of the derivative financial instruments.

All derivative financial instruments are carried in assets when amounts are receivable by the Company and in liabilities when amounts are payable by the Company. During the period a contract is open, changes in the value of the contracts are recognized as unrealized appreciation or depreciation to reflect the fair value of the contract at the reporting date. When the contracts settle, mature, terminate, or

 

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June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

are otherwise closed, the Company records realized gains or losses equal to the difference between the proceeds from (or cost of) the close-out of the contracts and the original contract price. Additionally, the Company records realized gains (losses) on open swap contracts when periodic payments are received or made at the end of each measurement period.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and accrued liabilities, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are disclosed in Note 8.

Cash

The Company places its cash with Santander Bank, N.A. (“Santander Bank”) and, at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company believes that Santander Bank is a high credit quality financial institution and that the risk of loss associated with any uninsured balances is remote. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.

Revenue Recognition

Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized gains or losses on the sale of investments are calculated using the specific identification method.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with senior and subordinated secured loans are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a senior or subordinated secured loan, any unamortized loan origination, closing and/or commitment fees are recorded as interest income. Generally, when a payment default occurs on a loan in the portfolio, or if the Company otherwise believes that the issuer of the loan will not be able to make contractual interest payments, the Company may place the loan on non-accrual status and cease recognizing interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient collateral value and is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in or sale of the business, the sale of the assets of the business, or some portion or combination thereof.

Dividend income is recorded on the ex-dividend date.

Structuring fees, excess deal deposits, prepayment fees and similar fees are recognized as Other Income from Investments as earned, usually when received, and are non-recurring in nature. Other fee income, including administrative and unused line fees, is included in Other Income from Investments. Income from such sources was $2,193,940 and $727,082 for the years ended June 30, 2016 and 2015, respectively. Management fee income is included in Other Income from Non-Investment Sources. For the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

year ended June 30, 2016, the Company earned $36,758 and waived $15,396 of management fee income related to the services performed for FCCIP. For the year ended June 30, 2015, the Company earned $67,163 of management fee income related to the services performed for FCCIP.

Change in unrealized gain (loss) on investments

Net change in unrealized appreciation or depreciation recorded on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

From time to time, the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Consolidated Statements of Operations as an increase in the Net Change in Unrealized Gain (Loss) on Investments.

Federal and State Income Taxes

The Company has elected to be treated as a Registered Investment Company (“RIC”) under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including payment-in-kind (“PIK”) interest, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed prior to the 15 th day of the ninth month after the tax year-end.

Permanent differences between ICTI and net investment income for financial reporting purposes are reclassified among capital accounts in the Consolidated Financial Statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended June 30, 2016 and 2015, the Company reclassified for book purposes amounts arising from permanent book/tax differences related as follows:

 

     Year Ended
June 30, 2016
     Year Ended
June 30, 2015
 

Capital in excess of par value

   $ (1,987,656    $ (1,302,681

Accumulated undistributed net investment income

     866,605        1,043,849  

Accumulated net realized gain (loss) from investments

   $ 1,121,051      $ 258,832  

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended June 30, 2016 and 2015 were as follows:

 

     Year Ended
June 30, 2016
     Year Ended
June 30, 2015
 

Ordinary income

   $ 6,093,604      $ 8,342,307  

Distributions of long-term capital gains

     —          —    

Return of capital

     1,051,922        1,302,681  
  

 

 

    

 

 

 

Distributions on a tax basis

   $ 7,145,526      $ 9,644,988  
  

 

 

    

 

 

 

For federal income tax purposes, the tax cost of investments owned at June 30, 2016 and 2015 was $99,533,983 and $176,255,797, respectively. The net unrealized depreciation on investments owned at June 30, 2016 and 2015 was $18,411,768 and $24,142,039, respectively.

At June 30, 2016 and 2015, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of certain investments in partnerships and wholly-owned subsidiary corporations, fee income and organizational expenses, as follows:

 

     As of
June 30, 2016
     As of
June 30, 2015
 

Accumulated capital losses

   $ (29,119,726    $ (8,519,497

Unrealized depreciation

     (18,411,768      (24,142,039
  

 

 

    

 

 

 

Components of distributable earnings at year end

   $ (47,531,494    $ (32,661,536
  

 

 

    

 

 

 

For the years ended June 30, 2016 and 2015, the long-term net capital loss carryfowards were $28,528,499 and $8,519,497, respectively, which will not expire. For the year ended June 30, 2016, the short-term net capital loss carryforwards were $591,260 and for the year ended June 30, 2015, there were no short-term net capital loss carryforwards.

The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the 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 a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. There were no material uncertain income tax positions at June 30, 2015. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company remains subject to examination by the Internal Revenue Service for the first full tax year ending June 30, 2011 and all future years.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

If we do not distribute (or are not deemed to have distributed) each calendar year sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), we will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

Distributions

Distributions to common stockholders are recorded on the ex-dividend date. The amounts, if any, of our monthly distributions are approved by our Board each quarter and are generally based upon our management’s estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.

Guarantees and Indemnification Agreements

We follow ASC Topic 460 — Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“ASC 460”). The application of ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual Consolidated Financial Statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees. ASC 460 did not have a material effect on the Consolidated Financial Statements. Refer to Note 5 for further discussion of guarantees and indemnification agreements.

Per Share Information

Basic and diluted earnings (loss) per common share is calculated using the weighted average number of common shares outstanding for the period presented. For the years ended June 30, 2016 and 2015, basic and diluted earnings (loss) per share, were the same because there are no potentially dilutive securities outstanding.

Offering Costs

The Company complies with the requirements of ASC 340-10-S99-1, “Expenses of Offering”. Deferred offering costs consist principally of legal and audit costs incurred through the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Company’s operations if the offering is not completed. Offering expenses related to the Company’s July 14, 2014, March 30, 2015, and April 13, 2015 offerings were $1,442,780. Refer to Note 6. Previously deferred costs charged to the Company’s operations during the year ended June 30, 2016 were $320,910 and are included in Other in the Statement of Operations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 2. Significant Accounting Policies — (Continued)

 

Recent Accounting Pronouncements

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015. The Company does not believe this standard will have an impact on its Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU 2016-01 requires an entity to measure equity investments at fair value through net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact on the Consolidated Financial Statements.

Note 3. Concentration of Credit Risk and Liquidity Risk

In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured limits. The Company is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of such financial institutions and does not anticipate any losses from these counterparties.

The Company utilizes one financial institution to provide financing, which may be essential to its business. There are a number of other financial institutions available that could potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating results.

Note 4. Earnings (Loss) per Common Share — Basic and Diluted

The following information sets forth the computation of basic and diluted earnings (loss) per common share for the years ended June 30, 2016 and 2015:

 

     Year Ended
June 30, 2016
    Year Ended
June 30, 2015
 

Per Share Data (1) :

    

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (9,700,162   $ (5,200,728

Weighted average shares outstanding for period basic and diluted

     22,662,947       14,803,637  
  

 

 

   

 

 

 

Basic and diluted earnings (loss) per common share

   $ (0.43   $ (0.35
  

 

 

   

 

 

 

 

(1)  

Per share data is based on weighted average shares outstanding.

 

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June 30, 2016

 

Note 5. Related Party Agreements and Transactions

Investment Advisory Agreement

On June 22, 2016, the Board re-approved the investment advisory agreement (the “Investment Advisory Agreement”) with the Adviser under which the Adviser, subject to the overall supervision of the Board, manages the day-to-day operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, our Adviser: (i) determines the composition of the Company’s portfolio, the nature and timing of the changes to the Company’s portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments the Company makes.

The Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to the Company are not impaired. For providing these services, the Adviser receives a fee from the Company consisting of two components, a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets, as adjusted. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets, as adjusted, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter will be appropriately prorated.

The total base management fees earned by the Adviser for the years ended June 30, 2016 and 2015 were $1,992,111 and $2,280,058, respectively. The total base management fee payable to the Adviser as of June 30, 2016 and 2015 was $379,944 and $580,607, respectively, after reflecting payments of $2,192,774 and $2,175,046 for the years ended June 30, 2016 and 2015, respectively, and is included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates.

The incentive fee has two parts. The first part of the incentive fee (the “Income incentive fee”) is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as prepayment fees, management fee income and similar fees that the Company receives from portfolio companies, including administrative and unused line fees accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement to Full Circle Service Company (the “Administrator”), and any interest expenses and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay in kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income does not include organizational costs or any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Company’s net investment income

 

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June 30, 2016

Note 5. Related Party Agreements and Transactions — (Continued)

 

used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 1.75% base management fee. The Company pays the Adviser an incentive fee with respect to its pre-incentive fee net investment income in each calendar quarter as follows:

 

   

no incentive fee in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the hurdle of 1.75%;

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.1875% in any calendar quarter (8.75% annualized). The Company refers to this portion of our pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.1875%) as the “catch-up.” The “catch-up” is meant to provide our investment adviser with 20% of the Company’s pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and

 

   

20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Adviser (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Adviser).

These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

Income incentive fees of $1,263,241 and $1,798,000 were earned by the Adviser for the years ended June 30, 2016 and 2015, respectively, and the total income incentive fee payable to the Adviser as of June 30, 2016 and 2015, was $0 and $462,350, respectively, after reflecting payment of $1,478,712 and $1,705,782 during the years ended June 30, 2016 and 2015, respectively, and is included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates. The Adviser waived $246,879 of income incentive fees for the year ended June 30, 2016 which are included in fees waiver and expense reimbursement on the Consolidated Statements of Operations. Any such fees are not subject to reimbursement or recoupment by the Adviser.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date) and will equal 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio, provided that, the incentive fee determined as of December 31, 2010 was calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation from the inception of Full Circle Capital. There were no incentive fees earned on realized capital gains for the years ended June 30, 2016 and 2015.

The Adviser agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, in excess of 1.50% of our net assets, beginning with our fiscal quarter ended September 30, 2014 through the end of the Company’s fiscal year 2015. For the Company’s fiscal year 2016 and beyond, the Adviser had agreed to

 

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June 30, 2016

Note 5. Related Party Agreements and Transactions — (Continued)

 

reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, in excess of 1.75% of our net assets; however, on February 11, 2016, the Board authorized the termination of the Adviser’s operating expense reimbursement obligations, effective as of January 1, 2016. The expense reimbursements from the Adviser for the years ended June 30, 2016 and 2015 were $506,364 and $989,818, respectively, and is included in the fees waiver and expense reimbursement line on the Consolidated Statements of Operations.

The Adviser had agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and organizational and offering expenses, in excess of 2% of our net assets for the first twelve months following the completion of the initial public offering, which occurred on August 31, 2010.

For the periods commencing on April 1, 2015 and ending on June 30, 2015, and commencing on July 1, 2015 and ending on June 30, 2016, Full Circle Advisors had agreed to waive the portion of the base management fees and incentive fees that Full Circle Advisors would otherwise be entitled to receive pursuant to our Investment Advisory Agreement to the extent required in order for the Company to earn net investment income sufficient to support the distribution payment on the shares of the Company’s common stock outstanding on the relevant record date for each monthly distribution as then declared by the Board; however, on February 11, 2016, the Board authorized the termination of the Adviser’s management fee and incentive fee waiver, effective as of January 1, 2016. Full Circle Advisors will not be entitled to recoup any amounts previously waived pursuant to this agreement. For the year to date period ending December 31, 2015, $214,129 of the base management fee waiver was accrued for and is included in the fees waiver and expense reimbursement line in the Consolidated Statements of Operations.

The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Adviser and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Investment Advisory Agreement or otherwise as an investment adviser of the Company.

Administration Agreement

On June 22, 2016, the Board re-approved the Administration Agreement with the Administrator under which the Administrator, among other things, furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, the Administrator also performs, or oversees the performance of, the Company’s required administrative services, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders. In addition, the Administrator assists the Company in determining and publishing its net asset value, oversees the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 5. Related Party Agreements and Transactions — (Continued)

 

administrative and professional services rendered to the Company by others. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of Full Circle Service Company’s overhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the compensation of our chief financial officer and our allocable portion of the compensation of any administrative support staff employed by the Administrator, directly or indirectly. Under the Administration Agreement, the Administrator will also provide on our behalf managerial assistance to those portfolio companies that request such assistance. The Administration Agreement may be terminated by either party, without penalty, upon 60 days’ written notice to the other party.

The Administrator and Conifer Asset Solutions LLC (“Conifer” or the “Sub-Administrator”) may also provide administrative services to the Adviser to satisfy the Adviser’s obligation to us under the Investment Advisory Agreement. As a result, the Adviser also reimburses the Administrator and/or the Sub-Administrator for its allocable portion of the Administrator’s and/or Sub-Administrator’s overhead, including rent, the fees and expenses associated with performing compliance functions for Full Circle Advisors, and its allocable portion of the compensation of any administrative support staff. To the extent the Adviser or any of its affiliates manage other investment vehicles in the future, no portion of any administrative services provided by the Administrator to such other investment vehicles will be charged to the Company.

The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Administrator and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from Full Circle Capital for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Administrator’s services under the Administration Agreement or otherwise as administrator for the Company.

Sub-Administration Agreement

The Administrator has engaged Conifer to provide certain administrative services to the Company on behalf of the Administrator. In exchange for providing such services, the Administrator pays Conifer an asset-based fee with a $200,000 annual minimum as adjusted for any reimbursement of expenses. This asset-based fee will be reimbursed to the Administrator by the Company and will vary depending upon the Company’s gross assets, as adjusted, as follows:

 

Gross Assets

  

Fee

first $150 million of gross assets

  

20 basis points (0.20%)

next $150 million of gross assets

  

15 basis points (0.15%)

next $200 million of gross assets

  

10 basis points (0.10%)

in excess of $500 million of gross assets

  

5 basis points (0.05%)

For the years ended June 30, 2016 and 2015, the Company incurred $764,277 and $731,447, respectively, of expenses under the Administration Agreement, $246,268 and $256,236, respectively, of which were earned by the Sub-Administrator and $305,226 and $303,652, respectively, were reimbursed for officers’ compensation. The remaining $212,783 and $171,559, respectively, were recorded as an

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 5. Related Party Agreements and Transactions — (Continued)

 

Allocation of Overhead Expenses in the Consolidated Statements of Operations. For the year ended June 30, 2016, the Company reimbursed Full Circle Service Company $23,374 for travel expenses borne by related parties that were the responsibility of the Company. These amounts are included as Other in the Consolidated Statements of Operations.

FC Capital Investment Partners, LLC

On June 4, 2014, the Company formed FC Capital Investment Partners, LLC (“FCCIP”), a multiple series private fund, for which the Company serves as the managing member and investment adviser. FCCIP was formed as a Delaware limited liability company and operates under a Limited Liability Company Agreement dated June 13, 2014. FCCIP closed its first series on June 17, 2014, raising approximately $5.6 million in capital from investors. FCCIP closed its second series on September 25, 2014, raising approximately $10.0 million in capital from investors. On November 30, 2015, the second series ceased investing and was liquidated after full realization of proceeds from its investment strategy. The Company may co-invest in certain portfolio investments from time to time with one or more series issued by FCCIP where the Company determines that the aggregate available investment opportunity exceeds what it believes would be appropriate for the Company to acquire directly, subject to certain conditions. During the year ended June 30, 2016, the Company earned $36,758 and waived $15,396 of management fee income related to the services performed for FCCIP. During the year ended June 30, 2015, the Company earned $67,163 of management income related to services performed for FCCIP. Such amounts are included in Other Income from Non-Investment Sources on the Consolidated Statements of Operations.

Managerial Assistance

As a business development company, the Company offers, and must provide upon request, managerial assistance to certain of its portfolio companies. This assistance could involve, among other things, monitoring the operations of the Company’s portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. With regard to the Control Investment in Texas Westchester Financial, LLC, the Company has provided managerial assistance during the period for which no fees were charged. The Company’s Chairman, John Stuart, previously served as a director of The Finance Company, LLC, which was previously a Control Investment.

Houlihan Lokey

Houlihan Lokey, an affiliated entity of one of the Company’s directors, provided services to the Company during the period subject to an Engagement Letter approved by the Special Committee of the Board of Directors. The director affiliated with Houlihan Lokey did not participate in this decision making and selection process or any subsequent activities of the Special Committee. The amount of expenses incurred under this agreement were $500,000 and is included in the Consolidated Statements of Operations in Professional Services Expense.

Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances

Equity offerings are included in the Company’s capital accounts on the date that the Company assumes the obligation to issue the shares. For purposes of the calculation of Net Asset Value Per Share,

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances — (Continued)

 

Earnings Per Share and Per Share Data, the related shares are treated as outstanding on the same date that the equity offering is included in the Company’s capital accounts.

Offering expenses are generally charged against paid-in capital in excess of par. The proceeds raised, the related underwriting fees, the offering expenses, and the price at which common stock was issued, since inception, are detailed in the following table:

 

Issuances of

Common Stock

   Number of
Shares

Issued
    Gross Proceeds
Raised, Net Assets
Acquired and

Dividends
Reinvested
     Underwriting Fees     Offering
Expenses
     Gross
Offering Price
 

April 16, 2010

     100     $ 1,500      $ —       $ —        $ 15.00 per/share  

August 31, 2010

     4,191,415 (1)       $ 42,425,564      $ —       $ —        $ 10.13 per/share (2)    

August 31, 2010

     2,000,000     $ 18,000,000      $ 1,350,000     $ 1,052,067      $ 9.00 per/share  

November 27, 2012

     1,350,000     $ 10,665,000      $ 533,250     $ 153,330      $ 7.90 per/share  

January 14, 2014

     1,892,300 (3)       $ 13,492,099      $ 539,684     $ 261,994      $ 7.13 per/share  

February 27, 2014

     630,000     $ 4,920,300      $ —   (4)       $ 47,236      $ 7.81 per/share  

June 19, 2014

     1,351,352     $ 10,000,005      $ —   (4)       $ 44,826      $ 7.40 per/share  

July 14, 2014

     506,000     $ 3,744,400      $ —   (4)       $ 37,775      $ 7.40 per/share  

March 30, 2015

     11,205,921     $ 39,220,723      $ 952,214 (5)       $ 449,446      $ 3.50 per/share  

April 13, 2015

     80,475     $ 281,663      $ —       $ 3,345      $ 3.50 per/share  

 

(1)  

Includes 403,662 shares that were issued on September 30, 2010 upon the expiration of the overallotment option granted to the underwriters in connection with our initial public offering. Such shares were deemed to be outstanding at August 31, 2010.

(2)  

Based on weighted average price assigned to shares.

(3)  

Includes 242,300 overallotment shares that were granted to the underwriters in connection with our January 14, 2014 follow-on offering. The underwriters exercised their option to purchase additional shares on January 27, 2014. Such shares were deemed to be outstanding at January 14, 2014.

(4)  

This was a registered offering placed directly with investors.

(5)  

Shares were issued pursuant to a rights offering. The dealer manager received $952,214 for services provided in connection with the rights offering.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances — (Continued)

 

On August 26, 2015, the Board authorized the purchase of an additional 1.0 million shares to increase and provide for the purchase of up to 2.0 million shares of the outstanding common stock as part of the share repurchase program. Under the repurchase program, the Company may, but is not obligated to, repurchase its outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act. The number of shares repurchased, the repurchase price, cost and weighted average discount per share is summarized in the following table:

 

Repurchase of Common Stock

   Number
of Shares
Repurchased
     Average
Repurchase Price
     Total Cost      Weighted
Average
Discount
Per Share
 

Three months ended September 30, 2015

     472,407        $3.19 per/share      $ 1,504,819        25.9 % (1)  

Three months ended December 31, 2015

     290,780        $3.16 per/share      $ 917,566        21.1 % (2)  

 

(1)  

The average discount rate per share, based upon the Net Asset Value per share at June 30, 2015, is weighted based upon the total shares repurchased during the period.

(2)  

The average discount rate per share, based upon the Net Asset Value per share at September 30, 2015, is weighted based upon the total shares repurchased during the period.

For the three months ended March 31, 2016 and June 30, 2016, the Company did not repurchase any shares under the share repurchase program. As of September 28, 2016, the Company has repurchased an aggregate of 763,187 shares under the share repurchase program at the weighted average price of $3.17 per share, resulting in $2.4 million of cash paid, under the program.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Note 7. Financial Highlights

 

     Year
Ended
June 30,
2016
    Year
Ended
June 30,
2015
    Year
Ended
June 30,
2014
    Year
Ended
June 30,
2013
    Year
Ended
June 30,
2012
 

Per Share Data (1) :

          

Net asset value at beginning of period

   $ 4.30     $ 6.38     $ 8.01     $ 8.59     $ 9.08  

Accretion (dilution) from offering(s) (2)

     —         (0.92     0.03       (0.18     —    

Accretion from share repurchases (3)

     0.03       —         —         —         —    

Offering costs

     —         (0.06     (0.04     (0.02     —    

Net investment income (loss)

     0.28       0.63       0.71       0.77       0.78  

Net change in unrealized gain (loss)

     0.24       (0.51     (1.36     0.37       (0.32

Net realized gain (loss)

     (0.94     (0.51     (0.11     (0.60     (0.03

Dividends from net investment income

     (0.28     (0.63     (0.69     (0.78     (0.80

Return of capital

     (0.04     (0.08     (0.17     (0.14     (0.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period

   $ 3.59     $ 4.30     $ 6.38     $ 8.01     $ 8.59  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at end of period

   $ 2.70     $ 3.57     $ 7.81     $ 7.83     $ 7.65  

Total return based on market value (4)

     (14.98 )%      (46.78 )%      11.51     15.12     8.71

Total return based on net asset value (4)

     (6.15 )%      (21.53 )%      (11.00 )%      4.94     6.20

Shares outstanding at end of period

     22,472,243       23,235,430       11,443,034       7,569,382       6,219,382  

Weighted average shares outstanding for period

     22,662,947       14,803,637       8,698,814       7,018,286       6,219,382  

Ratio/Supplemental Data:

          

Net assets at end of period

   $ 80,670,495     $ 99,938,567     $ 72,980,277     $ 60,644,039     $ 53,442,785  

Average net assets

   $ 90,618,873     $ 78,137,174     $ 64,360,541     $ 57,842,601     $ 55,531,518  

Ratio of gross operating expenses to average net assets

     12.29     13.51     12.11     11.52     9.56

Ratio of net operating expenses to average net assets

     11.22     11.69     12.11     11.52     8.99

Ratio of net investment income (loss) to average net assets

     6.94     11.02     9.37     9.30     8.70

Ratio of net operating expenses excluding management fees (net of waiver), incentive fees, and interest expense to average net assets

     3.67     1.51     3.04     3.53     3.15

Portfolio Turnover

     82     74     88 % (5)       73 % (5)       58 % (5)  

 

(1)  

Financial highlights are based on weighted average shares outstanding.

(2)  

Accretion and dilution from offering(s) is based on the net change in net asset value from each follow-on offering.

(3)  

Accretion from share repurchases during the period is based on the net change in net asset value from the share repurchases.

(4)  

Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in the period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. The total returns are not annualized.

(5)  

Unaudited

Note 8. Long Term Liabilities

Line of Credit

On June 3, 2013, the Company entered into a credit facility (the “Credit Facility”) with Santander Bank. The facility size was originally $32.5 million and replaced the Company’s credit facility with FCC. LLC d/b/a First Capital. The Credit Facility was subsequently increased to $45.0 million on November 6, 2013. On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the Credit Facility. The Company did not exercise its option to expand the Credit Facility. On June 3,

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 8. Long Term Liabilities — (continued)

 

2016, the Company entered into a further amendment to its credit facility with Santander Bank to, among other things, (i) reduce the size of the facility from $45.0 million to $5.0 million, (ii) extend the termination date until October 3, 2016 and (iii) limit the Company’s ability to make any dividends, distributions, redemptions or other acquisitions of securities or other equity interests in the Company in excess of $10.0 million in the aggregate through October 3, 2016.

The Credit Facility matures on October 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (one month, two month or three month, depending on the Company’s option) plus 3.25% to 4.00% per annum, or from Santander Bank’s prime rate plus 1.25% to 2.00% per annum, based on the Company’s election. As of June 30, 2016, one month LIBOR, two month LIBOR, and three month LIBOR were 0.47%, 0.55%, and 0.65%, respectively. As of June 30, 2016, the Prime Rate was 3.50%. In addition, a fee of 0.50% to 1.00% per annum, depending on utilization, is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Company’s assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.

The fees and expenses associated with opening and expanding the Credit Facility are being amortized over the term of the Credit Facility in accordance with ASC 470, Debt. In accordance with ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, debt issuance costs associated with our revolving credit facilities remain classified as an asset, regardless of whether there are any outstanding borrowings on the facility. As of June 30, 2016, of the total $830,104 of fees and expenses incurred, $51,486 remains to be amortized and is reflected as Deferred Credit Facility Fees on the Consolidated Statements of Assets and Liabilities.

At June 30, 2016 and June 30, 2015, the Company did not have any outstanding borrowings under the Credit Facility.

Notes Payable

On June 28, 2013, the Company issued $21.1 million in aggregate principal amount of 8.25% Notes due June 30, 2020 (the “Notes”) (including a partial exercise of the underwriters’ overallotment option in July 2013) for net proceeds of $20.0 million after deducting underwriting commissions of approximately $860,822 and offering expenses of $246,453.

On July 14, 2014, the Company closed an offering of $12.5 million in aggregate principal amount of the Notes. The Notes were sold at price of $25.375 per Note plus accrued interest from June 30, 2014, a premium to par value of $25.00 per Note for total gross proceeds of approximately $12.7 million. The Notes are a further issuance of rank, equally in right of payment with, and form a single series with the $21.1 million of currently outstanding Notes that will mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 30, 2016. The Notes are listed on the NASDAQ Global Market and trade under the trading symbol “FULLL”.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 8. Long Term Liabilities — (continued)

 

The offering expenses and underwriting commissions are being amortized over the term of the Notes in accordance with ASC 470, Debt. Additionally, in accordance with ASU 2015-03, debt issuance costs related to the Notes are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the Notes. As such, as of June 30, 2016, of the total $1,150,940 issuance costs incurred, $675,046 remains to be amortized and is included in, and offsets, the Notes Payable balance in the Consolidated Statements of Assets and Liabilities. Additionally, $135,498 of the $187,500 premium related to the July 14, 2014 issuance remains unamortized and is included in the Notes Payable balance in the Consolidated Statements of Assets and Liabilities.

As of June 30, 2015, of the total $1,150,940 issuance costs incurred, $833,541 remained to be amortized and is included in, and offsets, the Notes Payable balance in the Consolidated Statements of Assets and Liabilities. Additionally, $158,504 of the $187,500 premium related to the July 14, 2014 issuance remained unamortized and is included in the Notes Payable balance in the Consolidated Statements of Assets and Liabilities.

The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the “Indenture”), between the Company and U.S. Bank National Association (the “Trustee”). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a fixed rate of 8.25% per annum, beginning September 30, 2013. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol “FULLL” with a par value of $25.00 per share.

The Indenture contains certain covenants, including covenants requiring compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of June 30, 2016, the Company had not repurchased any of the Notes in the open market.

At June 30, 2016 and June 30, 2015, the Company had a principal balance of $33,645,525 on the Notes, which is included in Notes Payable in the Consolidated Statements of Assets and Liabilities.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 8. Long Term Liabilities — (continued)

 

The following shows a summary of the Long Term Liabilities as of June 30, 2016 and June 30, 2015:

As of June 30, 2016

 

Facility

   Commitments      Borrowings
Outstanding
     Fair
Value
 

Credit Facility (1)

   $ 5,000,000      $ —        $ —    

Notes

     33,645,525        33,645,525        34,264,603  
  

 

 

    

 

 

    

 

 

 

Total

   $ 38,645,525      $ 33,645,525      $ 34,264,603  
  

 

 

    

 

 

    

 

 

 

As of June 30, 2015

 

Facility

   Commitments      Borrowings
Outstanding
     Fair
Value
 

Credit Facility (1)

   $ 45,000,000      $ —        $ —    

Notes

     33,645,525        33,645,525        34,049,271  
  

 

 

    

 

 

    

 

 

 

Total

   $ 78,645,525      $ 33,645,525      $ 34,049,271  
  

 

 

    

 

 

    

 

 

 

 

(1)  

On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company did not exercise its option to expand the facility. On June 3, 2016, the Company entered into a further amendment to the Credit Facility with Santander Bank to, among other things, (i) reduce the size of the facility from $45.0 million to $5.0 million, (ii) extend the termination date until October 3, 2016 and (iii) limit the Company’s ability to make any dividends, distributions, redemptions or other acquisitions of securities or other equity interests in the Company in excess of $10.0 million in the aggregate through October 3, 2016.

The fair values of the Company’s Credit Facility and Notes are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s Notes is determined by utilizing market quotations at the measurement date.

Note 9. Fair Value Measurements

The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). See Note 2 for a discussion of the Company’s policies.

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 9. Fair Value Measurements — (continued)

 

The following tables present information about the Company’s assets measured at fair value as of June 30, 2016 and June 30, 2015:

 

     As of June 30, 2016  
     Level 1      Level 2      Level 3      Total  

Assets

           

Senior and Subordinated Loans, at fair value

   $ —        $ —        $ 80,701,466      $ 80,701,466  

Limited Liability Company Interests, at fair value

     —          —          100,000        100,000  

Investments in Warrants, at fair value

     —          —          320,749        320,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ —        $ —        $ 81,122,215      $ 81,122,215  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of June 30, 2015  
     Level 1      Level 2      Level 3      Total  

Assets

           

Senior and Subordinated Loans, at fair value

   $ —        $ 12,275,000      $ 121,630,798      $ 133,905,798  

Limited Liability Company Interests, at fair value

     —          —          1,228,978        1,228,978  

Investments in Warrants, at fair value

     —          90        2,695,075        2,695,165  

Common Stock, at fair value

     1,308,818        —          12,975,000        14,283,818  

Open Swap Contract, at fair value

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,308,818      $ 12,275,090      $ 138,529,851      $ 152,113,759  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended June 30, 2016, the senior secured term loan and warrants in US Shale Solutions, Inc. were transferred from Level 2 to Level 3. During the year ended June 30, 2015, a portion of the Level 3 General Cannabis Corp. warrant was converted into Level 1 Common Stock.

The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the net unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 9. Fair Value Measurements — (continued)

 

The tables below reflect the changes in Level 3 assets and liabilities measured at fair value for the years ended June 30, 2016 and 2015.

 

    Year Ended June 30, 2016  
    Beginning
Balance
July 1,
2015
    Amortization
&
Accretion of
Fixed
Income
Premiums &
Discounts
    Realized &
Unrealized
Gains
(Losses)
    Transfers
Into
Level 3 (2)
    Purchases (1)     Sales &
Settlements
    Ending
Balance
June 30,
2016
    Change in
Unrealized
Gains
(Losses)
for
Investments
still held at
June 30,
2016
 

Assets

               

Senior and Subordinated Loans, at fair value

  $ 121,630,798     $ 1,553,243     $ (9,832,169   $ 4,455,000     $ 87,604,057     $ (124,709,463   $ 80,701,466     $ (9,580,531

Limited Liability Company Interests, at fair value

    1,228,978       —         (2,448,791     —         4,325,739       (3,005,926     100,000       (4,225,839

Warrants, at fair value

    2,695,075       —         (2,374,416     90       —         —         320,749       (84,926

Common Stock, at fair value

    12,975,000       —         2,145,000       —         —         (15,120,000     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

    138,529,851       1,553,243       (12,510,376     4,455,090       91,929,796       (142,835,389     81,122,215       (13,891,296
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

               

Open Swap Contract, at fair value

    —         —         (1,882,293     —         1,882,293       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 138,529,851     $ 1,553,243     $ (14,392,669   $ 4,455,090     $ 93,812,089     $ (142,835,389   $ 81,122,215     $ (13,891,296
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Includes PIK interest.

(2)  

Represents the transfer of US Shale Solutions, Inc. into Level 3.

 

    Year Ended June 30, 2015  
    Beginning
Balance
July 1,
2014
    Amortization
&
Accretion of
Fixed
Income
Premiums &
Discounts
    Realized &
Unrealized
Gains
(Losses)
    Transfers
out of
Level 3 (2)
    Purchases (1)     Sales &
Settlements
    Ending
Balance
June 30,
2015
    Change in
Unrealized
Gains
(Losses)
for
Investments
still held at
June 30,
2015
 

Assets

               

Senior and Subordinated Loans, at fair value

  $ 111,079,608     $ 1,371,720     $ (6,728,531   $ —       $ 113,149,706     $ (97,241,705   $ 121,630,798     $ (7,918,295

Limited Liability Company Interests, at fair value

    3,875,583       —         (2,474,886     —         —         (171,719     1,228,978       (1,171,144

Warrants, at fair value

    3,060,421       —         (2,194,114     (486,786     2,328,768       (13,214     2,695,075       (337,902

Common Stock, at fair value

    —         —         —         —         12,975,000       —         12,975,000       —    

Open Swap Contract, at fair value

    —         —         1,081       —         —         (1,081     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 118,015,612     $ 1,371,720     $ (11,396,450   $ (486,786   $ 128,453,474     $ (97,427,719   $ 138,529,851     $ (9,427,341
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Includes PIK interest.

(2)  

Represents the transfer of a portion of the General Cannabis Corp. warrant out of Level 3 into Level 1 Common Stock upon conversion.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 9. Fair Value Measurements — (Continued)

 

Realized and unrealized gains and losses are included in net realized gain (loss) and net change in unrealized gain (loss) in the Consolidated Statements of Operations. The change in unrealized losses for Level 3 investments still held at June 30, 2016 of $13,891,296 is included in net change in unrealized gain (loss) in the Consolidated Statements of Operations for the year ended June 30, 2016. The change in unrealized losses for Level 3 investments still held at June 30, 2015 of $9,427,341 is included in net change in unrealized gain (loss) in the Consolidated Statements of Operations for the year ended June 30, 2015.

The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2016:

 

Description

  Fair Value     Valuation Technique   Unobservable
Inputs
 

Range (Average) (1)

Senior and Subordinated Loans

  $ 67,666,509     Discounted cash flows

(income approach)

  Discount Rate  

3.70% - 50.00%

(13.12%)

    5,359,848     Precedent Transactions   Transaction Value   N/A
    7,675,109     Liquidation Value   Asset Value   N/A
 

 

 

       

Total

    80,701,466        
 

 

 

       

Limited Liability Interests and Warrants (Private Companies)

    209,844     Market comparable companies

(market approach)

  EBITDA multiple  

6.00x –6.00x

(6.00x)

    100,000     Liquidation Value   Asset Value   N/A
 

 

 

       

Total

    309,844        
 

 

 

       

Warrant (Public Companies)

    110,905     Option Pricing Model   Volatility  

50.00% - 61.40%

(55.70%)

 

 

 

       

Total Level 3 Investments

  $ 81,122,215        
 

 

 

       

 

(1)  

The average values were determined using the weighted average of the fair value of the investments in each investment category.

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 9. Fair Value Measurements — (Continued)

 

The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2015:

 

Description

   Fair Value     

Valuation Technique

  

Unobservable
Inputs

  

Range (Average) (1)

Senior and Subordinated Loans

   $ 91,569,415     

Discounted cash

flows (income approach)

   Discount Rate   

8.51% – 55.00%

(16.27%)

     26,739,621      Precedent Transactions    Transaction Value    N/A
     3,321,762      Liquidation Value    Asset Value    N/A
  

 

 

          

Total

     121,630,798           
  

 

 

          

Limited Liability Interests, Warrants, and Common Stock (Private Companies)

     3,719,553     

Market comparable companies

(market approach)

   EBITDA multiple   

4.00x – 7.25x

(5.15x)

     12,975,000      Precedent Transactions    Transaction Value    N/A
     177,500      Liquidation Value    Asset Value    N/A
  

 

 

          

Total

     16,872,053           
  

 

 

          

Warrant (Public Companies)

     27,000      Option Pricing Model    Volatility    32.588%

Open Swap Contract

     —        Option Pricing Model   

Broker

Quotes

  

$212.50/share –

$220.00/share

($216.50/share)

  

 

 

          

Total Level 3 Investments

   $ 138,529,851           
  

 

 

          

 

(1)  

The average values were determined using the weighted average of the fair value of the investments in each investment category.

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.

The primary significant unobservable input used in the fair value measurement of the Company’s private equity and warrant investments is the EBITDA multiple, which is used to determine the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 9. Fair Value Measurements — (Continued)

 

levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.

The primary unobservable inputs used in the fair value measurement of the Company’s warrant investments, when using an option pricing model, are the discount rate and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of a warrant using an option pricing model.

Note 10. Derivative Financial Instruments

In the normal course of business, the Company may utilize derivative contracts in connection with its investment activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The derivative activities and exposure to derivative contracts primarily involve equity price risks. In addition to the primary underlying risk, additional counterparty risk exists due to the potential inability of counterparties to meet the terms of their contracts.

Warrants

The warrants provide exposure and potential gains upon equity appreciation of the portfolio company’s equity value.

The value of a warrant has two components: time value and intrinsic value. A warrant has a limited life and expires on a certain date. As a warrant’s expiration date approaches, the time value of the warrant will decline. In addition, if the stock underlying the warrant declines in price, the intrinsic value of an “in the money” warrant will decline. Further, if the price of the stock underlying the warrant does not exceed the strike price of the warrant on the expiration date, the warrant will expire worthless. As a result, there is the potential for the entire value of an investment in a warrant to be lost.

Counterparty risk exists from the potential failure of an issuer of warrants to settle its exercised warrants. The maximum risk of loss from counterparty risk is the fair value of the contracts and the purchase price of the warrants. The Company’s Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.

Swap contracts — general

The Company may enter into swap contracts, including interest rate swaps, total return swaps, and credit default swaps, as part of its investment strategy, to hedge against unfavorable changes in the value of investments and to protect against adverse movements in interest rates or credit performance with counterparties. Generally, a swap contract is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified notional amount of the underlying assets. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Payments are disclosed as

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 10. Derivative Financial Instruments — (Continued)

 

realized gain (loss) on open swap contracts on the Consolidated Statements of Operations. If the payment is a receivable as of the end of the period, it is disclosed as receivable on open swap contract on the Consolidated Statements of Assets and Liabilities.

The fair value of open swaps reported in the Consolidated Statements of Assets and Liabilities may differ from that which would be realized in the event the Company terminated its position in the contract. Risks may arise as a result of the failure of the counterparty to the swap contract to comply with the terms of the swap contract. The loss incurred by the failure of counterparty is generally limited to the aggregate fair value of swap contracts in an unrealized gain position, as adjusted for any collateral posted to us by the counterparty or by us with the counterparty. Therefore, the Company considers the creditworthiness of each counterparty to a swap contract in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in the fair value of the underlying investments.

Total return swaps

The Company is subject to market risk in the normal course of pursuing its investment objectives. The Company may enter into total return swaps either to manage its exposure to the market or certain sectors of the market, or to create exposure to certain investments to which it is otherwise not exposed.

Total return swap contracts involve the exchange by the Company and a counterparty of their respective commitments to pay or receive a net amount based on the change in the fair value of a particular security or index and a specified notional amount.

During the year ended June 30, 2015, the Company funded one synthetic secured loan in the form of a total return swap. More specifically, the Company purchased 60,000 shares of Granite Ridge Holdings, LLC, a power generation company. The Company contemporaneously entered into a collateralized swap agreement with another private fund, which posted approximately $10.4 million of cash collateral, whereby the Company swapped the returns on the shares for a fixed rate of 15.0% on the net loan amount. Under the terms of the swap, the Company expected to receive periodic payments from the counterparty. These periodic payments were recorded as realized capital gains for accounting purposes in accordance with GAAP. The Company did not enter into any total return swaps during the year ended June 30, 2016.

During the year ended June 30, 2016, Granite Ridge Holdings, LLC was sold and the Company received proceeds for a redemption of the Company’s LLC interests, and the related holdback, of approximately $15.2 million, resulting in a realized gain of approximately $2.1 million. Concurrently, the total return swap was unwound and the Company realized a loss of approximately $2.1 million on the swap contract on that date. From the inception of the swap contract through its termination in the quarter ended March 31, 2016, the Company recognized realized losses of approximately $1.9 million, which when aggregated with the realized gain on the LLC interests in Granite Ridge Holdings, LLC, resulted in a total realized gain on the transactions of $262,707. The gains and losses on the transactions are disclosed separately in the Consolidated Statements of Operations as realized gain (loss) on investments and realized gain (loss) on open swap contracts.

 

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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Note 11. Strategic Transaction

On June 23, 2016, the Company and Great Elm Capital Corp., a Maryland corporation (“GECC”) entered into a definitive merger agreement (the “Merger Agreement”) under which the Company will merge with and into GECC, with GECC as the surviving corporation (the “Merger”). Concurrently with the execution of the Merger Agreement, GECC, Great Elm Capital Group, Inc. (“Great Elm”) and certain investment funds (the “Funds”) managed by MAST Capital Management, LLC (“MAST”) entered into a subscription agreement (the “Subscription Agreement”). Pursuant to the Subscription Agreement, (i) Great Elm has contributed $30 million in cash to GECC in exchange for shares of GECC’s common stock and (ii) the Funds have agreed to contribute an investment portfolio, presently valued at approximately $90 million, also in exchange for shares of GECC’s common stock. The contribution of the investment portfolio will occur prior to the closing of the Merger. When the Merger becomes effective, GECC, as the surviving corporation, will be externally managed by Great Elm Capital Management, Inc. (“GECM”), pursuant to a new investment advisory agreement. GECM will be owned by Great Elm. Great Elm has advised the Company that GECM will employ substantially all of the investment and back office personnel of MAST. The obligations of the parties to the Merger Agreement and the Subscription Agreement are subject to various conditions. The Company also entered into an agreement (the “Termination Agreement”) with Full Circle Advisors and Full Circle Service Company providing for the future termination of the Investment Advisory Agreement, dated July 13, 2010, and Administration Agreement, dated July 14, 2010, as required under the Merger Agreement.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, (i) we will merge with and into GECC with GECC continuing as the surviving corporation. In the Merger, all of the Company’s outstanding shares of common stock will be converted into shares of GECC’s common stock. The amount of GECC’s common stock to be received by the Company’s stockholders will be derived from an exchange ratio (the “Exchange Ratio”), which will be calculated based on our net asset value as of the month-end preceding the date on which the definitive proxy statement relating to the Merger is mailed to the Company’s stockholders, subject to adjustments as described below.

Pursuant to the terms of the Merger Agreement, the Company’s Board of Directors intends to declare a special cash distribution to the Company’s stockholders of record as of the close of business on the day on which the Merger becomes legally effective.

The Merger Agreement provides that the Company’s Board of Directors will declare a special cash distribution, which will be payable after the Merger to the persons who are the record holders of shares of the Company’s common stock immediately before the effective time of the Merger, in an aggregate amount equal to the sum of:

 

   

$5,000,000; and

 

   

$408,763, the positive amount of the Company’s net investment income, calculated in accordance with generally accepted accounting principles in the United States GAAP, from March 31, 2016 through August 31, 2016; and

 

   

the amount of net investment income paid or accrued on the Company’s investment portfolio and on its cash balances from August 31, 2016 through the effective time of the merger.

The amount of the special cash distribution is expected to be approximately $0.24 per share of the Company’s common stock. The special cash distribution will be paid by the exchange agent appointed

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 11. Strategic Transaction — (Continued)

 

to process exchanges of GECC share certificates for the Company’s share certificates upon delivery by the holders of the Company’s common stock of a letter of transmittal.

Neither the special cash distribution, nor any dividends or other distributions with respect to shares of GECC common stock will be paid to any former Full Circle stockholders who held their shares in certificated form and who have not surrendered their certificates to the exchange agent for shares of GECC common stock until those certificates are surrendered in accordance with the letter of transmittal. Following the surrender of any such certificates in accordance with the letter of transmittal, the record holders of such certificates will be entitled to receive, without interest, the special cash distribution and the amount of dividends or other distributions with a record date after the Effective Time payable with respect to shares of GECC common stock exchangeable for those certificates and not previously paid.

The Company expects that a significant part of the $5.0 million fixed portion of the special cash distribution will be a distribution in excess of Full Circle Capital’s current and accumulated earnings and profits and could be treated as a return of capital for U.S. federal income tax purposes.

The closing of the Merger is subject to the satisfaction of customary closing conditions, including, among others, the registration and listing of the shares of common stock of GECC that will be issued in the Merger and the approval of the Merger by the holders of a majority of the outstanding shares of the common stock of the Company (the “Company Stockholder Approval”).

The Merger Agreement contains customary representations, warranties and covenants of each party, including covenants providing for the Company and GECC (i) to conduct their respective businesses in all material respects in the ordinary course of business and in a manner consistent with past practice during the period between the execution of the Merger Agreement and the effective time of the Merger, (ii) not to engage in certain kinds of transactions during such period, and (iii) only with respect to the Company, to convene and hold a meeting of its stockholders to consider and vote upon the approval of the Merger.

The Merger Agreement contains a customary “no-shop” provision which prohibits the Company and its subsidiaries from engaging in certain actions with respect to any other offer or proposal relating to an acquisition, merger or business combination resulting in ownership of more than 25% of the Company or its assets (an “Acquisition Proposal”). Subject to certain exceptions, the Company may not: (i) initiate, solicit or knowingly encourage any inquiries with respect to any Acquisition Proposal; (ii) engage in negotiations or discussions that reasonably could be expected to lead to an Acquisition Proposal; (iii) approve, endorse or recommend any Acquisition Proposal; or (iv) execute or enter into any letter of intent, agreement in principle, merger agreement, acquisition agreement or any similar agreement relating to any Acquisition Proposal.

The “no shop” provision is subject to a customary “fiduciary out” provision that allows the Company, under certain circumstances and in compliance with certain obligations, to provide non-public information and engage in discussions and negotiations with any third party making an Acquisition Proposal if the Company’s Board of Directors determines in good faith, after consultation with counsel and its financial advisor, that such third party is reasonably likely to submit a Superior Proposal. A “Superior Proposal” is a bona fide proposal in writing relating to an acquisition, merger or business

 

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Index to Financial Statements

FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 11. Strategic Transaction — (Continued)

 

combination resulting in ownership of more than 50% of the Company or its assets that is reasonably likely to be consummated and which has terms more favorable to the Company and its stockholders from a financial point of view than those set forth in the Merger Agreement and related documents.

At any time prior to obtaining the Company Stockholder Approval, subject to certain conditions, the Company’s Board of Directors may endorse the Superior Proposal and may change its recommendation regarding the Merger if the Company’s Board of Directors has determined in good faith (after consultation with counsel) that the failure to take action would be inconsistent with the directors’ fiduciary duties. Any such action can be taken only after giving three business days advance notice to GECC and during those three business days the Company must negotiate with GECC (if GECC wishes to negotiate) to adjust the terms and conditions of the Merger Agreement to make them at least as favorable to the Company’s stockholders as the Superior Proposal.

The Merger Agreement contains certain termination rights for both the Company and GECC, including if the Merger is not completed on or before October 31, 2016 (subject to extension under certain circumstances), or if the Company Stockholder Approval is not obtained. In the event of a termination of the Merger Agreement under certain circumstances, including termination of the Merger Agreement by the Company to enter into a definitive agreement with respect to a Superior Proposal or termination by GECC as a result of a change of recommendation by the Company’s Board of Directors, the Company will be required to pay GECC a termination fee of $3.0 million. Additionally, in the event that the Company Stockholder Approval is not obtained and a proposal for a business combination with a third party or an acquisition by a third party of 50% of more of the shares or assets of the Company (each, an “Alternative Transaction”) has been publicly announced and not withdrawn, upon termination of the Merger Agreement by us or GECC, the Company will be required to reimburse GECC for its out of pocket expenses, up to a maximum of $1.0 million (the “Expense Reimbursement”). If the Company enters into a definitive agreement for one or more Alternative Transactions within 12 months after termination of the Merger Agreement, the Company will be required to pay GECC a termination fee of $3.0 million, less the Expense Reimbursement.

Note 12. Subsequent Events

Recent Portfolio Activity

On July 8, 2016, the subordinated secured term loan to Bioventus, LLC was sold for total proceeds of approximately $6.0 million.

On August 17, 2016, the Company foreclosed on the commercial property underlying its loan to JN Medical Corporation (“JNI”). Subsequent to the foreclosure, on September 14, 2016 the Company entered into a forbearance agreement with JNI, which among other things, required JNI to enter into a triple net lease agreement with respect to the commercial property and to fund an initial payment of $730,723 to the Company in addition to resuming all other obligations under the loan agreement.

The Company holds collateralized note obligations from PEAKS Trust 2009-1. ITT Educational Services Inc. (“ITT”) has guaranteed payment on these notes. On August 26, 2016, ITT announced that it would no longer be accepting new students for enrollment during the current academic year. Subsequently ITT terminated operations at its campuses and on September 16, 2016 ITT filed for Chapter

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 12. Subsequent Events — (Continued)

 

7 bankruptcy. To the degree that ITT has liabilities in excess of the proceeds resulting from the Chapter 7 proceedings, ITT may not be able to meet obligations under its guarantee, which could impair the value of the notes. At August 31, 2016, the Company valued the notes at 70.91% of par value as compared to 83.92% of par value at June 30, 2016. The Company is currently reviewing the situation, but does not expect a significant change in the value of the notes due to the status of ITT.

Note 13. Commitments and Contingencies

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of June 30, 2016, the Company had approximately $8.6 million in unfunded loan commitments, subject to the Company’s approval in certain instances, to provide debt financing to certain of its portfolio companies.

The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its business, financial condition or results of operations.

 

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Index to Financial Statements

Schedule 12 — 14

The table below represents the fair value of control and affiliate investments at June 30, 2015 and any amortization, purchases, sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of June 30, 2016.

Schedule of Investments in and Advances to Affiliates

 

Portfolio Company/

Type of Investment

  Par
Amount/
Quantity at
June 30,
2016
    Amount of
Interest
and
Dividends
Credited in
Income
    Fair Value at
June 30,
2015
    Accretion/
Amortization
    Purchases     Sales     Realized
and
Unrealized
Gains/
Losses
    Fair
Value at
June 30,
2016
 

Control Investments

               

Takoda Resources Inc.

               

Senior Debt/Common Stock (1),(2)

  $ —       $ —       $ 161,585     $ —       $ —       $ (168,258   $ 6,673     $ —    

Texas Westchester Financial, LLC

               

Limited Liability Company Interests (1)

    9,278       —         177,500       —         —         (60,000     (17,500     100,000  

The Finance Company, LLC

               

Senior Debt (3) /Limited Liability Company Interests (2)

  $ —         498,242       5,006,194       7,938       —         (4,997,942     (16,190     —    

TransAmerican Asset Servicing Group, LLC

               

Senior Debt (2) /Limited Liability Company Interests (1),(2)

  $ —         —         466,785       —         323,359       (717,576     (72,568     —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 498,242     $ 5,812,064     $ 7,938     $ 323,359     $ (5,943,776   $ (99,585   $ 100,000  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

               

Modular Process Control, LLC

               

Senior Debt (1),(2) /Warrant (1),(2)

  $ —         287,601       3,663,827       17,082       1,306,664       (3,071,579     (1,915,994     —    

ProGrade Ammo Group, LLC

               

Senior Debt (1),(2) /Warrants (1),(2)

  $ —         —         2,590,309       —         147,121       (1,561,268     (1,176,162     —    

SOLEX Fine Foods, LLC; Catsmo, LLC

               

Senior Debt/Limited Liability Company
Interests (1),(2) /Warrant (1),(2)

  $ —         284,512       3,832,347       46,883       —         (3,861,696     (17,534     —    

US Oilfield Company, LLC

               

Senior Debt/Warrants (1)

  $ 5,768,743/5       521,338       5,683,338       12,799       6,315,061       (6,320,574     (5,377,269     313,355  

West World Media, LLC

               

Limited Liability Company Interests (1),(2)

    —         —         249,451       —         —         (2,143,900     1,894,449       —    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 1,093,451     $ 16,019,272     $ 76,764     $ 7,768,846     $ (16,959,017   $ (6,592,510   $ 313,355  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Nonincome-producing security.

(2)  

Investment is no longer held as of June 30, 2016.

(3)  

Investment is no longer a control investment at June 30, 2016. The Company sold the LLC interest in The Finance Company, LLC on March 15, 2016.

 

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Index to Financial Statements

Schedule 12 — 14

The table below represents the fair value of control and affiliate investments at June 30, 2014 and any amortization, purchases, sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of June 30, 2015.

Schedule of Investments in and Advances to Affiliates

 

Portfolio Company/

Type of Investment

  Par
Amount/
Quantity at
June 30,

2015
    Amount of
Interest
and
Dividends
Credited
in
Income
    Fair
Value at
June 30,
2014
    Accretion/
Amortization
    Purchases     Sales     Realized
and
Unrealized
Gains/
Losses
    Transfer
from
Control to
Non-Control/
Non-Affiliate
Investment
    Fair
Value at
June 30,
2015
 

Control Investments

                 

 

New Media West, LLC (2)

                 

Senior Debt/Limited Liability Company Interests (4)

  $ 3,811,681     $ 318,461     $ 5,666,679     $ —       $ —       $ (1,015,030   $ (4,651,649   $ —       $ —    

Takoda Resources Inc.

                 

Senior Debt/Common Stock (1)

  $ 3,054,532/749       118,703       2,557,379       —         453,272       (91,568     (2,757,498     —         161,585  

Texas Westchester Financial, LLC

                 

Limited Liability Company Interests (1)

    9,278       —         540,037       —         —         (171,717     (190,820     —         177,500  

The Finance Company, LLC

                 

Senior Debt/Limited Liability Company Interests

  $ 4,195,915/50       881,110       7,214,905       38,386       —         (967,632     (1,279,465     —         5,006,194  

TransAmerican Asset Servicing Group, LLC

                 

Senior Debt/Limited Liability Company Interests (1)

  $ 3,563,246/75       183,042       1,560,057       9,714       1,532,467       (977,374     (1,658,079     —         466,785  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Control Investments

    $ 1,501,316     $ 17,539,057     $ 48,100     $ 1,985,739     $ (3,223,321   $ (10,537,511   $ —       $ 5,812,064  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Affiliate Investments

                 

 

General Cannabis Corp. (3)

                 

Common Stock/Warrant (1),(4)

    654,409       —         2,356,212       —         113,214       (377,639     (600,986     (1,490,801     —    

Modular Process Control, LLC

                 

Senior Debt/Warrant (1)

  $ 7,151,027/1       1,205,914       3,971,110       99,410       2,282,926       (1,911,704     (777,915     —         3,663,827  

ProGrade Ammo Group, LLC

                 

Senior Debt/Warrants (1)

  $ 6,665,197/181,240       4,594       4,133,284       4,594       877,441       (2,305,294     (119,716     —         2,590,309  

SOLEX Fine Foods, LLC; Catsmo, LLC

                 

Senior Debt/Limited Liability Company Interests (1) /Warrant (1)

  $ 3,861,696/1/1       512,253       3,888,914       27,904       110,000       (148,304     (46,167     —         3,832,347  

US Oilfield Company, LLC

                 

Senior Debt/Warrants (1)

  $ 5,767,417/3       722,952       —         38,812       18,396,291       (12,714,465     (37,300     —         5,683,338  

West World Media, LLC

                 

Limited Liability Company Interests (1)

    148,326       —         238,897       —         —         —         10,554       —         249,451  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

    $ 2,445,713     $ 14,588,417     $ 170,720     $ 21,779,872     $ (17,457,406   $ (1,571,530   $ (1,490,801   $ 16,019,272  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

Nonincome-producing security.

(2)  

On June 30, 2015, New Media West, LLC transferred from a Control Investment to a Non-Control/Non-Affiliate Investment.

(3)  

As of May 13, 2015, General Cannabis Corp. transferred from an Affiliate Investment to a Non-Control/Non-Affiliate Investment. All purchases and sales after May 13, 2015 have been excluded from the purchase and sales columns in the above table. Realized and unrealized gains/losses have been prorated and only the realized and unrealized gains/losses which are attributable to the investment as an Affiliate Investment have been included.

(4)  

Investment no longer held as of June 30, 2015.

 

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Index to Financial Statements

 

 

$            

GREAT ELM CAPITAL CORP.

    % Notes due 20    

 

 

PRELIMINARY PROSPECTUS

 

 

 

Ladenburg Thalmann   Janney Montgomery Scott

 

 

, 2018

 

 

 


Table of Contents
Index to Financial Statements

PART C — OTHER INFORMATION

 

Item 25.

Financial Statements and Exhibits

Financial Statements

The financial statements listed in the index to consolidated financial statements to the prospectus are incorporated herein by reference.

Exhibits

Unless otherwise indicated, all references are to exhibits to the applicable filing by Great Elm Capital Corp. (the “Registrant”) under File No. 814-01211 with the Securities and Exchange Commission (the “SEC”).

 

Exhibit
Number

 

Description

(a)   Amended and Restated Charter of the Registrant (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on November 7, 2016)
(b)   Bylaws of the Registrant (incorporated by reference to Exhibit 2 to the Registration Statement on Form N-14 (File No. 333-212817) filed on August 1, 2016)
(d)(1)*   Form of global certificate for the Notes
(d)(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)
(d)(3)*   Form of Third Supplemental Indenture, by and between the Registrant and the Trustee
(d)(4)*   Form T-1 of the Trustee
(d)(5)   Form of certificate of 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)
(d)(6)   Global Note (6.50% Notes due 2022), dated September  18, 2017 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 19, 2017, as amended September 21, 2017)
(d)(7)   Global Note (6.50% Notes due 2022), dated September  29, 2017 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 29, 2017)
(d)(8)   Global Note (6.75% Notes due 2025), dated January  19, 2018 (incorporated by reference to Exhibit (d)(1) to the post-effective amendment to the Registration Statement on Form N-2 (File No.  333-221882) filed on January 19, 2018)
(d)(9)   First Supplemental Indenture, dated as of September  18, 2017, by and between the Registrant and the Trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K/A filed on September 21, 2017)
(d)(10)   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)
(e)   Form of Dividend Reinvestment Plan (incorporated by reference to Exhibit 13(d) to the pre-effective amendment to the Registration Statement on Form N-14 (File No. 333-212817) filed on September 26, 2016)
(g)   Investment Management Agreement, dated as of September  27, 2016, by and between the Registrant and Great Elm Capital Management, Inc. (“GECM”) (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on November 7, 2016)
(h)*   Form of Underwriting Agreement

 

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Table of Contents
Index to Financial Statements

Exhibit
Number

 

Description

(j)   Custodian Agreement, dated as of October  27, 2016, by and between the Registrant and State Street Bank and Trust Company (incorporated by reference to Exhibit 10.3 to the Form 10-K filed on March 30, 2017)
(k)(1)   Agreement and Plan of Merger, dated as of June  23, 2016, by and between Full Circle Capital Corporation and the Registrant (incorporated by reference to the Rule 425 filing (File No. 814-00809) on June 27, 2016)
(k)(2)   Subscription Agreement, dated as of June  23, 2016, by and among the Registrant, Great Elm Capital Group, Inc. and the investment funds signatory thereto (incorporated by reference to the Rule 425 filing (File No. 814-00809) on June  27, 2016)
(k)(3)   Administration Agreement, dated as of September  27, 2016, by and between the Registrant and GECM (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on November 7, 2016)
(k)(4)   Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on November 7, 2016)
(k)(5)   Amended and Restated Registration Rights Agreement, dated as of November  4, 2016, by and among the Registrant and the holders named therein (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on November 7, 2016)
(l)(1)*   Opinion of Jones Day
(l)(2)*   Opinion of Venable LLP
(n)(1)*   Consent of Deloitte & Touche LLP, Registered Independent Accounting Firm
(n)(2)*   Consent of RSM US LLP, Registered Independent Accounting Firm
(n)(3)*   Consent of Jones Day (included in Exhibit (l)(1))
(n)(4)*   Consent of Venable LLP (included in Exhibit (l)(2))
(n)(5)*   Power of Attorney (included on the signature page hereto)
(r)(1)   Code of Ethics of Registrant (incorporated by reference to Exhibit 14.1 to the Form 10-K filed on March 30, 2017)
(r)(2)   Code of Ethics of GECM (incorporated by reference to Exhibit 14.2 to the Form 10-K filed on March 30, 2017)

 

*

Filed herewith

The agreements included or incorporated by reference as exhibits to this registration statement contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.

 

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Table of Contents
Index to Financial Statements
Item 26.

Marketing Arrangements

The information contained under the heading “Underwriting” in the prospectus is incorporated herein by reference.

 

Item 27.

Other Expenses of Issuance and Distribution**

 

SEC registration fee

   $ 6,225  

Nasdaq Global Select Additional Listing Fees

     45,000  

FINRA filing fee

     8,000  

Accounting fees and expenses

     30,000  

Legal fees and expenses

     250,000  

Printing and engraving

     35,000  

Miscellaneous fees and expenses

     125,775  
  

 

 

 

Total

   $ 500,000  
  

 

 

 

 

**

These amounts (other than the SEC registration fee, Nasdaq fee and FINRA fee) are estimates.

 

Item 28.

Persons Controlled by or Under Common Control

 

Entity

   Ownership     Jurisdiction of
Organization

PF Facility Solutions LLC

     100   Delaware

Double Duce Lodging, LLC

     100   Texas

TFS-SC Holdings LLC

     100   Delaware

 

Item 29.

Number of Holders of Securities

The following table sets forth the number of record holders of our securities at September 27, 2018.

 

Title of Class

   Number of Record Holders  

Common Stock, par value $0.01 per share

     12  

6.50% Notes due 2022

     1  

6.75% Notes due 2025

     1  

 

Item 30.

Indemnification

Reference is made to Section 2-418 of the Maryland General Corporation Law, Article VII of the Registrant’s charter and Article XI of the Registrant’s bylaws.

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Registrant’s charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the Investment Company Act of 1940, as amended (the “Investment Company Act”).

The Registrant’s charter authorizes the Registrant, and the Registrant’s bylaws obligate the Registrant, to the maximum extent permitted by Maryland law and subject to the requirements of the Investment Company Act, to indemnify any present or former director or officer or any individual who, while serving as the Registrant’s director or officer and at the Registrant’s request, serves or has served another

 

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Index to Financial Statements

corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise as a director, officer, partner, member, manager or trustee and who is made, or threatened to be made, a party to, or witness in the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit the Registrant to indemnify and advance expenses to any person who served a predecessor of the Registrant in any of the capacities described above and any of the Registrant’s employees or agents or any employees or agents of the Registrant’s predecessor. In accordance with the Investment Company Act, the Registrant will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

Maryland law requires a corporation (unless its charter provides otherwise, which the Registrant’s charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to or in which they may be made, or threatened to be made, a party or witness by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Under Maryland law, a Maryland corporation may not indemnify a director or officer in a suit by the corporation or in its right in which the director or officer was adjudged liable to the corporation or in a suit in which the director or officer was adjudged liable on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by the corporation or in its right, or for a judgment of liability on the basis that a personal benefit was improperly received, is limited to expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer in advance of final disposition of a proceeding upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

Investment Manager, Administrator and Underwriter

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 Registrant 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 Registrant.

The Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or

 

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Table of Contents
Index to Financial Statements

entity affiliated with it are entitled to indemnification from the Registrant for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Registrant.

The Underwriting Agreement provides that each underwriter severally agrees to indemnify and hold harmless the Registrant, its directors and officers, and any person who controls the Registrant within the meaning of Section 15 of the Securities Act of 1933, as amended (the “Securities Act”), or Section 20 of the Securities Exchange Act of 1934, as amended, from and against any loss, liability, claim, damage or expense that the Registrant or any such person may incur, insofar as the loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information concerning such underwriter furnished in writing by or on behalf of such expressly for use in the registration statement (or in the registration statement as amended by any post-effective amendment hereof by the Registrant) or in the prospectus contained in the registration statement, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in the registration statement or such prospectus or necessary to make such information not misleading.

The law also provides for comparable indemnification for corporate officers and agents. Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The Registrant has entered into indemnification agreements with its directors. The indemnification agreements are intended to provide the Registrant’s directors the maximum indemnification permitted under Maryland law and the Investment Company Act. Each indemnification agreement provides that the Registrant shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Registrant.

 

Item 31.

Business and Other Connections of Investment Advisor

For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and directors of GECM, reference is made to GECM’s Form ADV, filed with the SEC under the Investment Advisers Act of 1940, as amended, and incorporated herein by reference upon filing.

 

Item 32.

Location of Accounts and Records

All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act and the rules thereunder are maintained at the offices of:

 

  1.

the Registrant, 800 South Street, Suite 230, Waltham, Massachusetts 02453;

 

  2.

the Transfer Agent, American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, New York 11219;

 

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Table of Contents
Index to Financial Statements
  3.

the Custodian, State Street Bank and Trust Company, 100 Huntington Avenue, Boston, Massachusetts 02116; and

 

  4.

GECM, 800 South Street, Suite 230, Waltham, Massachusetts 02453.

 

Item 33.

Management Services

Not applicable.

 

Item 34.

Undertakings

The Registrant undertakes:

 

  1.

Not applicable.

 

  2.

Not applicable.

 

  3.

Not applicable.

 

  4.

Not applicable.

 

  5.

(a) for the purpose of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this registration statement as of the time it was declared effective; and

(b) for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  6.

Not applicable.

 

C-6


Table of Contents
Index to Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waltham, and the Commonwealth of Massachusetts, on the 28th day of September, 2018.

 

GREAT ELM CAPITAL CORP.
By:   /s/ Peter A. Reed
Name:   Peter A. Reed
Title:   Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter A. Reed and Adam M. Kleinman (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign on his behalf individually and in each capacity stated below any and all amendments (including post-effective amendments) to this registration statement (including a related registration statement filed pursuant to Rule 462(b) of the Securities Act), and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated as of September 28, 2018.

 

Name

  

Capacity

/s/ Peter A. Reed

Peter A. Reed

  

Chief Executive Officer, President and Director

(Principal Executive Officer)

/s/ John J. Woods

John J. Woods

  

Chief Financial Officer and Treasurer (Principal

Financial Officer and Principal Accounting Officer)

/s/ Mark Kuperschmid

Mark Kuperschmid

  

Director

/s/ Randall Revell Horsey

Randall Revell Horsey

  

Director

/s/ Michael C. Speller

Michael C. Speller

  

Director

/s/ John E. Stuart

John E. Stuart

  

Director

Exhibit (d)(1)

Form of Global Note

This Security is a Global Note within the meaning of the Indenture hereinafter referred to and is registered in the name of The Depository Trust Company or a nominee thereof. This Security may not be exchanged in whole or in part for a Security registered, and no transfer of this Security in whole or in part may be registered, in the name of any Person other than The Depository Trust Company or a nominee thereof, except in the limited circumstances described in the Indenture.

Unless this certificate is presented by an authorized representative of The Depository Trust Company to the Company or its agent for registration of transfer, exchange or payment and such certificate issued in exchange for this certificate is registered in the name of Cede & Co., or such other name as requested by an authorized representative of The Depository Trust Company, any transfer, pledge or other use hereof for value or otherwise by or to any person is wrongful, as the registered owner hereof, Cede & Co., has an interest herein.

Great Elm Capital Corp.

 

No.    $                
   CUSIP No.
     ISIN No.   

% Notes Due

Great Elm Capital Corp., a corporation duly organized and existing under the laws of Maryland (herein called the “Company,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of              (U.S. $            ) on            ,        and to pay interest thereon from            ,            or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly on             ,             ,              and              in each year, commencing            ,            (provided, that if an Interest Payment Date falls on a day that is not a Business Day, then the applicable interest payment will be made on the next succeeding Business Day and no additional interest will accrue as a result of such delayed payment), at the rate of            % per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security is registered at the close of business on the Regular Record Date for such interest, which shall be             ,             ,              and              (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. This Security may be issued as part of a series.


Payment of the principal of (and premium, if any, on) and any such interest on this Security will be made at the Corporate Trust Office of the Trustee in New York, New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register, provided , further , however , that so long as this Security is registered to Cede & Co., such payment will be made by wire transfer in accordance with the procedures established by The Depository Trust Company and the Trustee.

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.


IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated:                

 

GREAT ELM CAPITAL CORP.
By:  

 

  Name: Peter A. Reed
  Title:   Chief Executive Officer

Attest

 

By:  

 

  Name: Adam M. Kleinman
  Title:   Secretary


This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

Dated:                

 

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC,
as Trustee
By:  

 

  Authorized Signatory


Great Elm Capital Corp.

% Notes due

This Security is one of a duly authorized issue of Securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an indenture, dated as of September 18, 2017 (herein called the “Base Indenture,” which term shall have the meaning assigned to it in such instrument), between the Company and American Stock Transfer & Trust Company, LLC, as Trustee (herein called the “Trustee,” which term includes any successor trustee under the Base Indenture), and reference is hereby made to the Base Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered, as amended and supplemented by the Third Supplemental Indenture relating to the Securities, by and between the Company and the Trustee (herein called the “Third Supplemental Indenture,” the Third Supplemental Indenture and the Base Indenture collectively are herein called the “Indenture”). In the event of any conflict between the Base Indenture and the Third Supplemental Indenture, the Third Supplemental Indenture shall govern and control.

This Security is one of the series designated on the face hereof, initially limited in aggregate principal amount to              (U.S. $            ), or up to              (U.S. $            )            aggregate principal amount if the underwriters’ over-allotment option to purchase additional Securities is exercised in full. Under a Board Resolution, Officers’ Certificate pursuant to Board Resolutions or an indenture supplement, the Company may from time to time, without the consent of the Holders of Securities, issue additional Securities of this series (in any such case “Additional Securities”) having the same ranking and the same interest rate, maturity and other terms as the Securities. Any Additional Securities and the existing Securities will constitute a single series under the Indenture and all references to the relevant Securities herein shall include the Additional Securities unless the context otherwise requires. The aggregate principal amount of outstanding Securities represented hereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions.

The Securities of this series are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after            ,            at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.

Notice of redemption shall be given in writing and mailed, first-class postage prepaid or by overnight courier guaranteeing next-day delivery, to each Holder of the Securities to be redeemed, not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date, at the Holder’s address appearing in the Security Register. All notices of redemption shall contain the information set forth in Section 1104 of the Base Indenture.

Any exercise of the Company’s option to redeem the Securities will be done in compliance with the Investment Company Act, to the extent applicable.


If the Company elects to redeem only a portion of the Securities, the Trustee will determine the method for selecting the particular Securities to be redeemed, in accordance with Section 1103 of the Base Indenture, the Investment Company Act and the rules of any national securities exchange or quotation system on which the Securities are listed, in each case to the extent applicable. In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.

Unless the Company defaults in payment of the Redemption Price, on and after the Redemption Date, interest will cease to accrue on the Notes called for redemption.

Holders of Securities do not have the option to have the Securities repaid prior to            ,            .

The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.

The Indenture provides that the Company may not consolidate with or merge with or into any other entity or convey or transfer all or substantially all of its properties and assets to any Person, unless certain specified conditions set forth in Section 801 of the Indenture are satisfied.

If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default (other than an Event of Default under Section 501(5) or Section 501(6) of the Indenture) with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of


such Event of Default as Trustee and offered the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such written request during the 60-day period after receipt of such written notice, and shall have failed to institute any such proceeding, for sixty (60) days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. If an Event of Default under Section 501(5) or Section 501(6) of the Indenture occurs, the entire principal amount of the Securities of this series will automatically become due and immediately payable.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiples of $25 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company, the Trustee or the Security Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee or the Security Registrar and any agent of the Company, the Trustee or the Security Registrar may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee, the Security Registrar, or any agent thereof shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

The Indenture and this Security shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws.

Exhibit (d)(3)

THIRD SUPPLEMENTAL INDENTURE

between

GREAT ELM CAPITAL CORP.

and

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC,

as Trustee

Dated as of

 

 


THIRD SUPPLEMENTAL INDENTURE

THIS THIRD SUPPLEMENTAL INDENTURE (this “Third Supplemental Indenture”), dated as of            ,            is between Great Elm Capital Corp., a Maryland corporation (the “Company”), and American Stock Transfer & Trust Company, LLC, as trustee (the “Trustee”). All capitalized terms used herein shall have the meaning set forth in the Base Indenture (as defined below).

RECITALS OF THE COMPANY

The Company and the Trustee executed and delivered an Indenture, dated as of September 18, 2017 (the “Base Indenture” and, as supplemented by this Third Supplemental Indenture, the “Indenture”), to provide for the issuance by the Company from time to time of the Company’s unsecured debentures, notes or other evidences of indebtedness (the “Securities”), to be issued in one or more series as provided in the Indenture.

The Company desires to issue and sell up to $            aggregate principal amount of the Company’s            % Notes due            (the “Notes”).

Sections 901(4) and 901(6) of the Base Indenture provide that without the consent of Holders of the Securities of any series issued under the Indenture, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental to the Base Indenture to (i) change or eliminate any of the provisions of the Indenture when there is no Security Outstanding of any series created prior to the execution of the supplemental indenture that is entitled to the benefit of such provision and/or (ii) establish the form or terms of Securities of any series as permitted by Section 201 and Section 301 of the Base Indenture.

The Company desires to establish the form and terms of the Notes and to modify, alter, supplement and change certain provisions of the Base Indenture for the benefit of the Holders of the Notes (except as may be provided in a future supplemental indenture to the Indenture (a “Future Supplemental Indenture”)).

The Company has duly authorized the execution and delivery of this Third Supplemental Indenture to provide for the issuance of the Notes and all acts and things necessary to make this Third Supplemental Indenture a valid, binding, and legal obligation of the Company and to constitute a valid agreement of the Company, in accordance with its terms, have been done and performed.

NOW, THEREFORE, for and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows:

ARTICLE I

TERMS OF THE NOTES

Section  1.01     The following terms relating to the Notes are hereby established:

(a)    The Notes shall constitute a series of Senior Securities having the title “    % Notes due                .” The Notes shall bear a CUSIP number of            and an ISIN number of            .


(b)    The aggregate principal amount of the Notes that may be initially authenticated and delivered under the Indenture (except for Notes authenticated and delivered upon registration of, transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 304, 305, 306, 906, 1107 or 1305 of the Base Indenture, and except for any Securities that, pursuant to Section 303 of the Base Indenture, are deemed never to have been authenticated and delivered under the Indenture) shall be $            (or up to $            aggregate principal amount if the underwriters’ over-allotment option is exercised in full). Under a Board Resolution, Officers’ Certificate pursuant to Board Resolutions or a Future Supplemental Indenture, the Company may from time to time, without the consent of the Holders of Notes, issue additional Notes (in any such case “Additional Notes”) having the same ranking and the same interest rate, maturity and other terms as the Notes. Any Additional Notes and the existing Notes will constitute a single series under the Indenture and all references to the relevant Notes herein shall include the Additional Notes unless the context otherwise requires.

(c)    The Stated Maturity of the Notes shall be            ,            . The entire outstanding principal of the Notes shall be payable on the Stated Maturity, unless earlier redeemed or repurchased in accordance with the provisions of the Indenture.

(d)    The rate at which the Notes shall bear interest shall be    % per annum. The date from which interest shall accrue on the Notes shall be            ,              or the most recent Interest Payment Date to which interest has been paid or provided for; the Interest Payment Dates for the Notes shall be             ,             ,              and              of each year, commencing            ,             (if an Interest Payment Date falls on a day that is not a Business Day, then the applicable interest payment will be made on the next succeeding Business Day and no additional interest will accrue as a result of such delayed payment); the initial interest period will be the period from and including            ,            to, but excluding, the initial Interest Payment Date, and the subsequent interest periods will be the periods from and including an Interest Payment Date to, but excluding, the next Interest Payment Date or the Stated Maturity, as the case may be; the interest so payable, and punctually paid or duly provided for, on any Interest Payment Date, will be paid to the Person in whose name the Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be             ,             ,              and              (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Payment of the principal of (and premium, if any, on) and any such interest on the Notes will be made at the office of the Trustee located at 6201 15th Avenue, Brooklyn, New York 11219, Attention: Great Elm Capital Corp. (    % Notes Due            ) and at such other address as designated by the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; provided , further , however , that so long as the Notes are registered to Cede & Co., such payment will be made by wire transfer in accordance with the procedures established by The Depository Trust Company and the Trustee. Interest on the Notes will be computed on the basis of a 360-day year of twelve 30-day months.

(e)    The Notes shall be initially issuable in global form (each such Note, a “Global Note”). The Global Notes and the Trustee’s certificate of authentication thereon shall be substantially in the form of Exhibit A to this Third Supplemental Indenture. Each Global Note shall represent the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or


increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Security Registrar, in accordance with Sections 203 and 305 of the Base Indenture.

(f)    The depositary for such Global Notes (the “Depositary”) shall be The Depository Trust Company, New York, New York. The Security Registrar with respect to the Global Notes shall be the Trustee.

(g)    The Notes shall be defeasible pursuant to Section 1402 or Section 1403 of the Base Indenture. Covenant defeasance contained in Section 1403 of the Base Indenture shall apply to the covenants contained in Sections 1006, 1009 and 1010 of the Indenture.

(h)    The Notes shall be redeemable pursuant to Section 1101 of the Base Indenture and as follows:

(i)    The Notes will be redeemable in whole or in part at any time or from time to time, at the option of the Company, on or after            ,             at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.

(ii)    Notice of redemption shall be given in writing and mailed, first-class postage prepaid or by overnight courier guaranteeing next-day delivery, to each Holder of the Notes to be redeemed, not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date, at the Holder’s address appearing in the Security Register. All notices of redemption shall contain the information set forth in Section 1104 of the Base Indenture.

(iii)    Any exercise of the Company’s option to redeem the Notes will be done in compliance with the Investment Company Act, to the extent applicable.

(iv)    If the Company elects to redeem only a portion of the Notes, the Trustee will determine the method for selecting the particular Notes to be redeemed, in accordance with Section 1103 of the Base Indenture, the Investment Company Act and the rules of any national securities exchange or quotation system on which the Notes are listed, in each case to the extent applicable.

(v)    Unless the Company defaults in payment of the Redemption Price, on and after the Redemption Date, interest will cease to accrue on the Notes called for redemption hereunder.

(i)    The Notes shall not be subject to any sinking fund pursuant to Section 1201 of the Base Indenture.

(j)    The Notes shall be issuable in denominations of $25 and integral multiples of $25 in excess thereof.


(k)    Holders of the Notes will not have the option to have the Notes repaid prior to the Stated Maturity. Nothing in this Section shall prohibit purchases by the Company in the open market, private transactions or otherwise prior to the Stated Maturity.

(l)    The Notes are hereby designated as “Senior Securities” under the Indenture.

(m)    For the avoidance of doubt, the reference in Section 301 of the Base Indenture to Senior Securities being unsubordinated and ranking equally and “pari passu” to all other Senior Indebtedness is intended to reflect that, notwithstanding that the Senior Securities are unsecured, the Senior Securities rank equally with the Senior Indebtedness solely with respect to the right to seek and enforce payment from the Company but not in terms of any collateral security or access to collateral or right to distributions or payments of proceeds of any collateral (including without limitation, cash, accounts or other assets of the Company or any of its subsidiaries), as to which the Senior Indebtedness has priority at all times.

ARTICLE II

REMEDIES

Section  2.01     Except as may be provided in a Future Supplemental Indenture, for the benefit of the Holders of the Notes but no other series of Securities under the Indenture, whether now or hereafter issued and Outstanding, Section 502 of the Base Indenture shall be amended by replacing the first paragraph thereof with the following:

“If an Event of Default (other than an Event of Default under Section 501(5) or Section 501(6)) with respect to the Notes at the time Outstanding occurs and is continuing, then and in every case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Notes may (and the Trustee shall at the request of such Holders) declare the principal of all the Notes to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration such principal or specified portion thereof shall become immediately due and payable. If an Event of Default under Section 501(5) or Section 501(6) occurs, the entire principal amount of all the Notes shall automatically become due and immediately payable.”

ARTICLE III

COVENANTS

Section  3.01     Except as may be provided in a Future Supplemental Indenture, for the benefit of the Holders of the Notes but no other series of Securities under the Indenture, whether now or hereafter issued and Outstanding, Article Ten of the Base Indenture shall be amended by adding the following new Sections 1008 through 1010 thereto, each as set forth below:

“Section 1008. Section 18(a)(1)(A) of the Investment Company Act.

The Company hereby agrees that for the period of time during which the Notes are Outstanding, the Company shall not violate, whether or not it is subject to, Section 18(a)(1)(A) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor


provisions thereto of the Investment Company Act, as such obligation may be amended or superseded but giving effect to any exemptive relief that may be granted to the Company by the Commission.

“Section 1009. Section 18(a)(1)(B) of the Investment Company Act.

The Company hereby agrees that for the period of time during which the Notes are outstanding, the Company shall not declare any dividend (except a dividend payable in stock of the Company), or declare any other distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has an asset coverage (as defined in the Investment Company Act) of at least the threshold specified in pursuant to Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or superseded (regardless of whether the Company is subject thereto), after deducting the amount of such dividend, distribution or purchase price, as the case may be, and giving effect, in each case, (i) to any exemptive relief granted to the Company by the Commission and (ii) to any no-action relief granted by the Commission to another business development company (or to the Company if it determines to seek such similar no-action or other relief) permitting the business development company to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Sections 61(a)(1) and (2) of the Investment Company Act, as such obligation may be amended or superseded, in order to maintain such business development company’s status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended.

“Section 1010. Commission Reports and Reports to Holders.

If, at any time, the Company is not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the Commission, the Company agrees to furnish to the Holders of Notes and the Trustee for the period of time during which the Notes are Outstanding: (i) within 90 days after the end of the each fiscal year of the Company, audited annual consolidated financial statements of the Company and (ii) within 45 days after the end of each fiscal quarter of the Company (other than the Company’s fourth fiscal quarter), unaudited interim consolidated financial statements of the Company. All such financial statements shall be prepared, in all material respects, in accordance with generally accepted accounting principles in the United States (GAAP).”

ARTICLE IV

MEETINGS OF HOLDERS OF SECURITIES

Section  4.01     Except as may be provided in a Future Supplemental Indenture, for the benefit of the Holders of the Notes but no other series of Securities under the Indenture, whether now or hereafter issued and Outstanding, Section 1505 of the Base Indenture shall be amended by replacing clause (c) thereof with the following:

“(c) At any meeting of Holders, each Holder of a Security of such series or proxy shall be entitled to one vote for each $25.00 principal amount of the Outstanding Securities of such series held or represented by such Holder; provided , however , that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy.”


ARTICLE V

MISCELLANEOUS

Section  5.01     This Third Supplemental Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. This Third Supplemental Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of the Indenture and shall, to the extent applicable, be governed by such provisions.

Section  5.02     In case any provision in this Third Supplemental Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

Section  5.03     This Third Supplemental Indenture may be executed in counterparts, each of which will be an original, but such counterparts will together constitute but one and the same Third Supplemental Indenture. The exchange of copies of this Third Supplemental Indenture and of signature pages by facsimile,  .pdf transmission, email or other electronic means shall constitute effective execution and delivery of this Third Supplemental Indenture for all purposes. Signatures of the parties hereto transmitted by facsimile,  .pdf transmission, email or other electronic means shall be deemed to be their original signatures for all purposes.

Section  5.04     The Base Indenture, as supplemented and amended by this Third Supplemental Indenture, is in all respects ratified and confirmed, and the Base Indenture and this Third Supplemental Indenture shall be read, taken and construed as one and the same instrument with respect to the Notes. All provisions included in this Third Supplemental Indenture supersede any conflicting provisions included in the Base Indenture with respect to the Notes, unless not permitted by law. The Trustee accepts the trusts created by the Base Indenture, as supplemented by this Third Supplemental Indenture, and agrees to perform the same upon the terms and conditions of the Base Indenture, as supplemented by this Third Supplemental Indenture.

Section  5.05     The provisions of this Third Supplemental Indenture shall become effective as of the date hereof.

Section  5.06     Notwithstanding anything else to the contrary herein, the terms and provisions of this Third Supplemental Indenture shall apply only to the Notes and shall not apply to any other series of Securities under the Indenture and this Third Supplemental Indenture shall not and does not otherwise affect, modify, alter, supplement or change the terms and provisions of any other series of Securities under the Indenture, whether now or hereafter issued and Outstanding.


Section  5.07     The recitals contained herein and in the Notes shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Third Supplemental Indenture, the Notes or any Additional Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Third Supplemental Indenture, authenticate the Notes and any Additional Notes and perform its obligations hereunder. The Trustee shall not be accountable for the use or application by the Company of the Notes or any Additional Notes or the proceeds thereof.


IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed as of the date first above written.

 

GREAT ELM CAPITAL CORP.
By:  

 

  Name:
  Title:
AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC, as Trustee
By:  

 

  Name:
  Title:

[Signature page to Third Supplemental Indenture]


Exhibit A – Form of Global Note

This Security is a Global Note within the meaning of the Indenture hereinafter referred to and is registered in the name of The Depository Trust Company or a nominee thereof. This Security may not be exchanged in whole or in part for a Security registered, and no transfer of this Security in whole or in part may be registered, in the name of any Person other than The Depository Trust Company or a nominee thereof, except in the limited circumstances described in the Indenture.

Unless this certificate is presented by an authorized representative of The Depository Trust Company to the Company or its agent for registration of transfer, exchange or payment and such certificate issued in exchange for this certificate is registered in the name of Cede & Co., or such other name as requested by an authorized representative of The Depository Trust Company, any transfer, pledge or other use hereof for value or otherwise by or to any person is wrongful, as the registered owner hereof, Cede & Co., has an interest herein.

Great Elm Capital Corp.

 

No.    $                
   CUSIP No.
     ISIN No.   

% Notes Due

Great Elm Capital Corp., a corporation duly organized and existing under the laws of Maryland (herein called the “Company,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of              (U.S. $            ) on            ,            and to pay interest thereon from            ,            or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly on             ,             ,              and              in each year, commencing            ,            (provided, that if an Interest Payment Date falls on a day that is not a Business Day, then the applicable interest payment will be made on the next succeeding Business Day and no additional interest will accrue as a result of such delayed payment), at the rate of            % per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security is registered at the close of business on the Regular Record Date for such interest, which shall be             ,             ,              and              (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. This Security may be issued as part of a series.


Payment of the principal of (and premium, if any, on) and any such interest on this Security will be made at the Corporate Trust Office of the Trustee in New York, New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register, provided , further , however , that so long as this Security is registered to Cede & Co., such payment will be made by wire transfer in accordance with the procedures established by The Depository Trust Company and the Trustee.

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.


IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated:                

 

GREAT ELM CAPITAL CORP.
By:  

 

  Name: Peter A. Reed
  Title:   Chief Executive Officer

Attest

 

By:  

 

  Name: Adam M. Kleinman
  Title:   Secretary


This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

Dated:                

 

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC,
as Trustee
By:  

 

  Authorized Signatory


Great Elm Capital Corp.

% Notes due

This Security is one of a duly authorized issue of Securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an indenture, dated as of September 18, 2017 (herein called the “Base Indenture,” which term shall have the meaning assigned to it in such instrument), between the Company and American Stock Transfer & Trust Company, LLC, as Trustee (herein called the “Trustee,” which term includes any successor trustee under the Base Indenture), and reference is hereby made to the Base Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered, as amended and supplemented by the Third Supplemental Indenture relating to the Securities, by and between the Company and the Trustee (herein called the “Third Supplemental Indenture,” the Third Supplemental Indenture and the Base Indenture collectively are herein called the “Indenture”). In the event of any conflict between the Base Indenture and the Third Supplemental Indenture, the Third Supplemental Indenture shall govern and control.

This Security is one of the series designated on the face hereof, initially limited in aggregate principal amount to                  (U.S. $            ), or up to              (U.S. $            )             aggregate principal amount if the underwriters’ over-allotment option to purchase additional Securities is exercised in full. Under a Board Resolution, Officers’ Certificate pursuant to Board Resolutions or an indenture supplement, the Company may from time to time, without the consent of the Holders of Securities, issue additional Securities of this series (in any such case “Additional Securities”) having the same ranking and the same interest rate, maturity and other terms as the Securities. Any Additional Securities and the existing Securities will constitute a single series under the Indenture and all references to the relevant Securities herein shall include the Additional Securities unless the context otherwise requires. The aggregate principal amount of outstanding Securities represented hereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions.

The Securities of this series are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after            ,            at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.

Notice of redemption shall be given in writing and mailed, first-class postage prepaid or by overnight courier guaranteeing next-day delivery, to each Holder of the Securities to be redeemed, not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date, at the Holder’s address appearing in the Security Register. All notices of redemption shall contain the information set forth in Section 1104 of the Base Indenture.

Any exercise of the Company’s option to redeem the Securities will be done in compliance with the Investment Company Act, to the extent applicable.


If the Company elects to redeem only a portion of the Securities, the Trustee will determine the method for selecting the particular Securities to be redeemed, in accordance with Section 1103 of the Base Indenture, the Investment Company Act and the rules of any national securities exchange or quotation system on which the Securities are listed, in each case to the extent applicable. In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.

Unless the Company defaults in payment of the Redemption Price, on and after the Redemption Date, interest will cease to accrue on the Notes called for redemption.

Holders of Securities do not have the option to have the Securities repaid prior to            ,            .

The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.

The Indenture provides that the Company may not consolidate with or merge with or into any other entity or convey or transfer all or substantially all of its properties and assets to any Person, unless certain specified conditions set forth in Section 801 of the Indenture are satisfied.

If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default (other than an Event of Default under Section 501(5) or Section 501(6) of the Indenture) with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in


respect of such Event of Default as Trustee and offered the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such written request during the 60-day period after receipt of such written notice, and shall have failed to institute any such proceeding, for sixty (60) days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. If an Event of Default under Section 501(5) or Section 501(6) of the Indenture occurs, the entire principal amount of the Securities of this series will automatically become due and immediately payable.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiples of $25 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company, the Trustee or the Security Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee or the Security Registrar and any agent of the Company, the Trustee or the Security Registrar may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee, the Security Registrar, or any agent thereof shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

The Indenture and this Security shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws.

Exhibit (d)(4)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM T-1

 

 

STATEMENT OF ELIGIBILITY

UNDER THE TRUST INDENTURE ACT OF 1939

OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE

 

    

Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2)

 

 

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC

(Exact name of trustee as specified in its charter)

 

 

 

New York   13-3439945

(State of incorporation of

organization if not a U.S. national bank)

 

(I.R.S. Employer

Identification Number)

 

6201 15 th Avenue,

Brooklyn, New York

  11219
(Address of principal executive offices)   (Zip Code)

Paul H. Kim

American Stock Transfer & Trust Company, LLC

6201 15th Avenue

Brooklyn, NY 11219

(718) 921-8183

(Name, address and telephone number of agent for service)

 

 

Great Elm Capital Corp.

(Exact name of obligor as specified in its character)

 

 

 

Maryland   81-2621577

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

800 South Street, Suite 230
Waltham, MA
  02454
(Address of principal executive offices)   (Zip Code)

 

 

% Notes due 20

(Title of the Indenture Securities)

 

 

 


Item 1. General Information.

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to which it is subject.

New York State Department of Financial Services

One State Street

New York, NY 10004-1511

(b) Whether it is authorized to exercise corporate trust powers.

The trustee is authorized to exercise corporate trust powers.

Item 2. Affiliations with Obligor.

If the obligor is an affiliate of the trustee, describe each such affiliation.

None.

Items 3-15.

Items 3-15 are not applicable because, to the best of the trustee’s knowledge, the obligor is not in default under any indenture for which the trustee acts as trustee.

Item 16. List of Exhibits.

Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939, as amended (the “Act”) and 17 C.F.R. 229.10(d).

 

Exhibit

  

Exhibit Title

T-1.1    A copy of the Articles of Organization of the Trustee, as amended to date
T-1.2    A copy of the Certificate of Authority of the Trustee to commence business
T-1.4    Limited Liability Trust Company Agreement of the Trustee
T-1.6    The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939
T-1.7    A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority


SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, American Stock Transfer & Trust Company, LLC, a limited liability trust company organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and the State of New York, on the 28th day of September, 2018.

 

AMERICAN STOCK TRANSFER

& TRUST COMPANY, LLC

 

Trustee

By:  

/s/ Paul H. Kim

 

    Name: Paul H. Kim

    Title: Assistant General Counsel


EXHIBIT T-1.1

ARTICLES OF ORGANIZATION

OF

AMERICAN STOCK TRANSFER  & TRUST COMPANY, LLC

We, the undersigned, all being of full age, four of us being citizens of the United States, having associated ourselves together for the purposes of forming a limited liability trust company under and pursuant to the Banking Law of the State of New York, do hereby certify the following:

 

First.    The name by which the limited liability trust company is to be known is American Stock Transfer & Trust Company, LLC.
Second.    The place where its principal office is to be located is 59 Maiden Lane, Borough of Manhattan, City, County, and State of New York.
Third.    The amount of its capital contributions is to be Five Million Dollars ($5,000,000), and the number of units into which such capital contributions are to be divided is five million (5,000,000) units with a par value of $1.00 each.
Fourth.    The company will not have classes or groups of members, therefore there is only one class of members. Each member shall share the same relative rights, powers, preferences, limitations, and voting powers.
Fifth.    The name, place of residence, and citizenship of each organizer are as follows:

 

Name

  

Residence

  

Citizenship

George Karfunkel

   Brooklyn, NY, USA    USA

Michael Karfunkel

   Brooklyn, NY, USA    USA

Cameron Blanks

   Cremorne Point, Australia    Australia

Timothy J. Sims

   Terrey Hills, Australia    Australia

Paul J. McCullagh

   Tamarama, Australia    Ireland

Joseph John O’Brien

   Bondi Beach, Australia    USA

Jay F. Krehbiel

   Darling Point, Australia    USA

 

Sixth.    The term of existence of the trust company is to be until December 31, 2030, unless the interest holders agree to extend such date.
Seventh.    The number of managers of the company is to be not less than seven nor more than fifteen.
Eighth.    The names of the organizers who shall manage the company until the first annual meeting of members are as follows: George Karfunkel, Michael Karfunkel, Cameron Blanks, Timothy J. Sims, Paul J. McCullagh, Joseph John O’Brien, and Jay F. Krehbiel.
Ninth.    The limited liability trust company is to exercise the powers conferred by Section 100 of the Banking Law. The limited liability trust company shall neither accept deposits nor make loans except for deposits and loans arising directly from the exercise of the fiduciary powers specified in Section 100 of the Banking Law.


IN WITNESS WHEREOF, We have made, signed, and acknowledged this certificate in duplicate this          day of March 2008.

 

/s/ George Karfunkel

     

     

George Karfunkel

      Paul J. McCullagh

/s/ Michael Karfunkel

     

     

Michael Karfunkel       Joseph John O’Brien

     

Cameron Blanks

     

     

Jay F. Krehbiel

     

Timothy J. Sims

     

 

NOTARY:      

State of NY

     )     
     )      ss.:

County of Kings

     )     

On this 28 th day of March, 2008 personally appeared before me

 

George Karfunkel

     

Michael Karfunkel

           
to me known to be the persons described in and who executed the foregoing certificate, and severally acknowledged that they executed the same.

/s/ Anthony J. Foti

Anthony J. Foti

Notary Public, State of New York

No. 01FO6022425

Qualified in Kings County

Commission Expires March 29, 2011


IN WITNESS WHEREOF, We have made, signed, and acknowledged this certificate in duplicate this          day of March 2008.

 

     

     

/s/ Paul J. McCullagh

George Karfunkel

      Paul J. McCullagh

     

     

     

Michael Karfunkel       Joseph John O’Brien

/s/ Cameron Blanks

Cameron Blanks

     

/s/ Jay F. Krehbiel

Jay F. Krehbiel

/s/ Timothy J. Sims

Timothy J. Sims

     

NOTARY:

 

State of New South Wales

     )     
     )      ss.:

County of Australia

     )     

On this 27th day of March, 2008 personally appeared before me

 

Cameron R. Blanks

     

Paul J. McCullagh

     

Timothy J. Sims

     

Jay F. Krehbiel

to me known to be the persons described in and who executed the foregoing certificate, and severally acknowledged that they executed the same.

 

     

/s/ Brendan Anthony Bateman

      Brendan Anthony Bateman


IN WITNESS WHEREOF, We have made, signed, and acknowledged this certificate in duplicate this          day of March 2008.

 

     

     

     

George Karfunkel

      Paul J. McCullagh

     

     

/s/ Joseph John O’Brien

Michael Karfunkel       Joseph John O’Brien

     

Cameron Blanks

     

     

Jay F. Krehbiel

     

Timothy J. Sims

     

 

NOTARY:      Kingdom of Thailand        }   
     Bangkok Metropolis        }    ss
     Embassy of the United States of America        }   

State of

            }   

County of

            }   

On this              day of      Mar 27 2008,                  personally appeared before me

 

* Joseph John O’Brien *      
                    
                    

to be the persons described in and who executed the foregoing certificate, and severally acknowledged that they executed the same.

 

/s/ Chamnannuch Scherer

     
Chamnannuch Scherer      
Consular Associate of the United States of America      
Indefinite      


EXHIBIT T-1.2

 

LOGO

Whereas, the Articles of Organization of AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC, of New York, New York, have heretofore been duly approved and said AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC has complied with the provisions of Chapter 2 of the Consolidated Laws,

Now Therefore I, David S. Fredsall, as Deputy Superintendent of Banks of the State of New York, do hereby authorize the said AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC to transact the business of a Limited Liability Trust Company, at 59 Maiden Lane, Borough of Manhattan, City of New York within this State.

In Witness Whereof, I have hereunto set my hand and affixed the official seal of the Banking Department, this 30 th day of May in the year two thousand and eight.

 

/s/ David S. Fredsall
Deputy Superintendent of Banks


THIRD AMENDED AND RESTATED

LIMITED LIABILITY TRUST COMPANY AGREEMENT

OF

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC

THIS THIRD AMENDED AND RESTATED LIMITED LIABILITY TRUST COMPANY AGREEMENT (as amended, amended and restated, supplemented or modified from time to time, the “ Agreement ”) of American Stock Transfer & Trust Company, LLC (the “ Company ”) dated as of this 29th day of June, 2015, by Armor Holding II LLC, as the sole member of the Company (the “ Member ”) amends and restates the Second Amended and Restated Limited Liability Trust Company Agreement of the Company dated as of June 26, 2013 (as amended by that certain First Amendment to the Second Amended and Restated Limited Liability Trust Company Agreement of the Company dated as of April 23, 2014) in its entirety.

RECITAL

The Member converted the Company into a limited liability trust company under the laws of the State of New York and now desires to amend and restate the written agreement governing the affairs of the Company in accordance with the provisions of the Limited Liability Company Law of the State of New York and any successor statute, as amended from time to time (the “ Act ”) and the Banking Law of the State of New York and any successor statute, as amended from time to time (the “ Banking Law ”).

ARTICLE 1

The Limited Liability Trust Company

a. Formation . The Member previously converted the Company into a limited liability trust company pursuant to the Act and the Banking Law; such conversion of the Company from a New York trust company into a New York limited liability trust company was approved by the New York Banking Board on April 17, 2008 in conformity with Section 102-a(3) of the Banking Law. The conversion to a limited liability trust company became effective on May 30, 2008, when the New York State Banking Department issued an Authorization Certificate for the converted entity.

b. Name . The name of the Company shall be “American Stock Transfer & Trust Company, LLC” and its business shall be carried on in such name with such variations and changes as the Board (as hereinafter defined) shall determine or deem necessary to comply with requirements of the jurisdictions in which the Company’s operations are conducted.

c. Business Purpose ; Powers . The purposes for which the Company is formed are:

(i) to exercise the powers conferred by Section 100 of the Banking Law, including corporate trust powers; personal trust powers; pension trust powers for tax-qualified pension trusts and retirement plans; and common or collective trust powers; provided, however, that the Company shall neither accept deposits nor make loans except for deposits and loans arising directly from the exercise of its fiduciary powers as specified in this Section 1(c); and

 

8


(ii) in furtherance of the foregoing, to engage in any lawful act or activity for which limited liability trust companies may be formed under the Banking Law.

d. Registered Office and Agent . The Secretary of State is designated as agent of the limited liability company upon whom process against it may be served. The post office address within or without this state to which the Secretary of State shall mail a copy of any process against the limited liability company served upon him or her is 6201 15th Avenue, Brooklyn, New York 11219.

e. Term . Subject to the provisions of Article 6 below, the Company shall continue until December 31, 2030, unless the Members agree to extend such date.

ARTICLE 2

The Member

a. The Member . The name and address of the Member is as follows:

 

Name

  

Address

    
Armor Holding II LLC    6201 15th Avenue,   
Brooklyn, New York 11219      

b. Actions by the Member; Meetings . All actions taken by the Member must be duly authorized by the board of managers of the Member (the “ Member’s Board ”) in accordance with the Shareholders Agreement (as hereinafter defined). Subject to the foregoing sentence, the Member may approve a matter or take any action at a meeting or without a meeting by the written consent of the Member. Meetings of the Member may be called at any time by the Member.

c. Liability of the Member . All debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Member shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a member, except as otherwise provided for by law.

d. Power to Bind the Company . Except as required by the Act or the Banking Law, the Member (acting in its capacity as such) shall have no authority to bind the Company to any third party with respect to any matter.

e. Admission of Members . New members shall be admitted only upon the prior written approval of the Member.

f. Engagement of Third Parties . The Company, may, from time to time, employ any Person or engage third parties to render services to the Company on such terms and for such compensation as the Member may reasonably determine, including, attorneys, investment consultants, brokers or finders, independent auditors and printers. Such employees and third parties may be affiliates of any Member. Persons retained, engaged or employed by the Company may also be engaged, retained or employed by and act on behalf of one or more Member or any of their respective affiliates.

 

9


ARTICLE 3

The Board

a. Management By Board of Managers .

(i) Subject to such matters which are expressly reserved hereunder, under the Act, under the Banking Law or under that certain Fourth Amended and Restated Shareholders Agreement, dated as of June 20, 2014, as amended from time to time, among the Shareholders of Armor Holdco, Inc. and Armor Holdco, Inc. (the “ Shareholders Agreement ”), to the Member for decision, the business and affairs of the Company shall be managed by a board of managers (the “ Board ”), which shall be responsible for policy setting, approving the overall direction of the Company and making all decisions affecting the business and affairs of the Company. In accordance with Section 7002 of the Banking Law, the Board shall consist of seven (7) to fifteen (15) individuals (the “ Managers ”). Such Managers shall be determined from time to time by resolution of the Member in accordance with Section 4.2 of the Shareholders Agreement.

(ii) Each Manager shall be elected by the Member and shall serve until his or her successor has been duly elected and qualified, or until his or her earlier removal, resignation, death or disability. Subject to the provisions of clause (iii) below, the Member may remove any Manager from the Board or from any other capacity with the Company at any time, with or without cause. A Manager may resign at any time upon written notice to the Member.

(iii) The Member may take all actions that it deems necessary to cause the Board to consist of the same managers who serve on the Member’s Board; provided that, subject to Article 3(a)(i) , the number of independent directors who serve on the Board may be greater or less than the number of independent directors who serve on the Member’s Board; provided , further , that in no event shall the Board be composed of less than three (3) independent directors. Accordingly, if any person who is a member of the Members’ Board ceases to be a member of such board for any reason, the Member may take such action as is necessary to remove such person from the Board and elect to the Board the person appointed to the Member’s Board in place of such person.

(iv) Any vacancy occurring on the Board as a result of the resignation, removal, death or disability of a Manager or an increase in the size of the Board shall be filled by the Member. A Manager chosen to fill a vacancy resulting from the resignation, removal, death or disability of a Manager shall serve the unexpired term of his or her predecessor in office.

b. Action By the Board .

(i) In accordance with Section 7010 of the Banking Law, a regular meeting of the Board shall be held at least ten (10) times a year; provided, however, that during any three (3) consecutive months, the Board shall meet at least twice. Each Manager may call a meeting of the Board upon two (2) days prior written notice to each Manager. The presence of a majority of the Managers then in office shall constitute a quorum at any meeting of the Board. All actions of the Board shall require the affirmative vote of a majority of the Managers then in office.

(ii) Meetings of the Board may be conducted in person or by conference telephone facilities. Any action required or permitted to be taken at any meeting of the Board may be taken without a meeting if such number of Managers sufficient to approve such action pursuant to the terms of this Agreement consent thereto in writing. Notice of any meeting may be waived by any Manager.

 

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c. Power to Bind Company . None of the Managers (acting in their capacity as such) shall have authority to bind the Company to any third party with respect to any matter unless the Board shall have approved such matter and authorized such Manager(s) to bind the Company with respect thereto.

d. Officers and Related Persons .

(i) The Board shall have the authority to appoint and terminate officers of the Company and retain and terminate employees, agents and consultants of the Company. The Board, to the extent permitted by applicable law and as provided in any resolution of the Board, may, from time to time in its sole and absolute discretion and without limitation, delegate such duties or any or all of its authority, rights and/or obligations, to any one or more officers, employees, agents, consultants or other duly authorized representatives of the Company as the Board deems appropriate, including the power, acting individually or jointly, to represent and bind the Company in all matters in accordance with the scope of their respective duties.

ARTICLE 4

Capital Structure and Contributions

a. Capital Structure . The capital structure of the Company shall consist of one class of common interests, par value $1.00 (the “ Common Interests ”). Each Common Interest shall entitle its holder to one vote per Common Interest on each matter on which the Member shall be entitled to vote. All Common Interests shall be identical with each other in every respect. The Company shall be authorized to issue 5,000,000 Common Interests. In exchange for all of the outstanding shares of American Stock Transfer & Trust Company held by the Member, the 5,000,000 Common Interests shall be issued to the Member. The Member shall own all of the Common Interests issued and outstanding.

b. Capital Contributions . From time to time, the Board may determine that the Company requires capital and may request the Member to make capital contribution(s) in an amount determined by the Board. A capital account shall be maintained for the Member, to which contributions and profits shall be credited and against which distributions and losses shall be charged.

c. Right to Issue Certificates . The ownership of a Common Interest by a Member shall be evidenced by a certificate (a “ Certificate ”) issued by the Company. All Common Interests in the Company shall be securities governed by Article 8 of the Uniform Commercial Code as in effect from time to time in any jurisdiction, including without limitation the State of New York.

d. Form of Certificates . Certificates attesting to the ownership of Common Interests in the Company shall be in substantially the form set forth in Exhibit A hereto and shall state that the Company is a limited liability trust company formed under the laws of the State of New York, the name of the Member to whom such Certificate is issued and that the Certificate represents limited liability trust company interests within the meaning of the Act and the Banking Law. Each Certificate shall bear the following legend:

“THIS CERTIFICATE EVIDENCES COMMON INTERESTS IN THE

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC (THE

“COMPANY”) AND SHALL BE A SECURITY FOR PURPOSES OF

ARTICLE 8 OF THE UNIFORM COMMERCIAL CODE. THE

COMMON INTERESTS REPRESENTED BY THIS CERTIFICATE

 

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ARE SUBJECT TO THE PROVISIONS OF THE THIRD AMENDED

AND RESTATED LIMITED LIABILITY TRUST COMPANY

AGREEMENT OF THE COMPANY DATED AS OF JUNE 29, 2015

(AS MAY BE AMENDED, RESTATED, AMENDED AND

RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME,

THE “LLTC AGREEMENT”). A COPY OF THE LLTC

AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER

OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN

REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF

BUSINESS.”

e. Execution . Each Certificate shall be signed by the Chief Executive Officer, the President, the Secretary, an Assistant Secretary or other authorized officer or person of the Company by either manual or facsimile signature.

f. Registrar . The Company shall maintain an office where Certificates may be presented for registration of transfer or for exchange. Unless otherwise designated, the Secretary of the Company shall act as registrar and shall keep a register of the Certificates and of their transfer and exchange.

g. Issuance . The Certificates of the Company shall be numbered and registered in the interest register or transfer books of the Company as they are issued.

h. Common Interest Holder Lists . The Company shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all holders of Common Interests.

i. Transfer and Exchange . When Certificates are presented to the Company with a request to register a transfer, the Company shall register the transfer or make the exchange on the register or transfer books of the Company; provided, that any Certificates presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by the holder thereof or his attorney duly authorized in writing. Notwithstanding the foregoing, the Company shall not be required to register the transfer, or exchange, any Certificate if as a result the transfer of the Common Interest at issue would cause the Company or the Member to violate the Securities Act, the Exchange Act, the Investment Company Act, or the laws, rules, regulations, orders and other directives of any Governmental Authority or otherwise violate the terms of this Agreement or the Shareholders Agreement.

j. Record Holder . Except to the extent that the Company shall have received written notice of an assignment of Common Interests and such assignment complies with the requirements of Section 7(a) of this Agreement, the Company shall be entitled to treat the individual or entity in whose name any Certificates issued by the Company stand on the books of the Company as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such Common Interests on the part of any other individual or entity.

k. Replacement Certificates . If any mutilated Certificate is surrendered to the Company, or the Company receives evidence to its satisfaction of the destruction, loss or theft of any Certificate, the Company shall issue a replacement Certificate if the requirements of Section 8-405 of the Uniform Commercial Code are met. If required by the Company, an indemnity and/or the deposit of a bond in such form and in such sum, and with such surety or sureties as the Company may direct,

 

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must be supplied by the holder of such lost, destroyed or stolen Certificate that is sufficient in the judgment of the Company to protect the Company from any loss that it may suffer if a Certificate is replaced. The Company may charge for its expenses incurred in connection with replacing a Certificate.

ARTICLE 5

Profits, Losses and Distributions

a. Profits and Losses . For financial accounting and tax purposes, the Company’s net profits or net losses shall be determined on an annual basis in accordance with the manner determined by the Board. In each year, profits and losses shall be allocated entirely to the Member.

b. Distributions . The Board shall determine profits available for distribution and the amount, if any, to be distributed to the Member, and shall authorize and distribute on the Common Interests, the determined amount when, as and if declared by the Board. The distributions of the Company shall be allocated entirely to the Member, provided, however, such distributions are in accordance with the Banking Law.

ARTICLE 6

Events of Dissolution

The Company shall be dissolved and its affairs wound up only upon the occurrence of any of the following events (each, an “ Event of Dissolution ”):

a. The Board votes for dissolution; or

b. A dissolution of the Company under Section 102-a(2) of the Banking Law or Section 701 of the Act.

ARTICLE 7

Transfer of Interests in the Company

Except upon approval of the Member’s Board in accordance with Section 4.2 of the Member’s Shareholder’s Agreement, the Member may sell, assign, transfer, convey, gift, exchange or otherwise dispose of any or all of its Common Interests and, upon receipt by the Company of a written agreement executed by the person or entity to whom such Common Interests are to be transferred agreeing to be bound by the terms of this Agreement, such person shall be admitted as a member.

ARTICLE 8

Exculpation and Indemnification

a. Exculpation . The Member shall not have any liability for the obligations or liabilities of the Company except to the extent provided in the Act or Banking Law. Notwithstanding any other provisions of this Agreement, whether express or implied, or any obligation or duty at law or in equity, none of the Member, Managers, or any officers, directors, stockholders, partners, employees, affiliates, representatives or agents of any of the foregoing, nor any officer, employee, representative or agent of the Company (individually, a “ Covered Person ” and, collectively, the “ Covered Persons ”) shall be liable to the Company or any other person for any act or omission (in relation to the Company, its

 

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property or the conduct of its business or affairs, this Agreement, any related document or any transaction or investment contemplated hereby or thereby) taken or omitted by a Covered Person in the reasonable belief that such act or omission is in or is not contrary to the best interests of the Company and is within the scope of authority granted to such Covered Person by the Agreement, provided such act or omission does not constitute fraud, willful misconduct, bad faith, or gross negligence.

b. Indemnification . To the fullest extent permitted by law, the Company shall indemnify and hold harmless each Covered Person from and against any and all losses, claims, demands, liabilities, expenses, judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative (“ Claims ”), in which the Covered Person may be involved, or threatened to be involved, as a party or otherwise, by reason of its management of the affairs of the Company or which relates to or arises out of the Company or its property, business or affairs. A Covered Person shall not be entitled to indemnification under this Section 8 with respect to (i) any Claim with respect to which such Covered Person has engaged in fraud, willful misconduct, bad faith or gross negligence or (ii) any Claim initiated by such Covered Person unless such Claim (or part thereof) (A) was brought to enforce such Covered Person’s rights to indemnification hereunder or (B) was authorized or consented to by the Board. Expenses incurred by a Covered Person in defending any Claim shall be paid by the Company in advance of the final disposition of such Claim upon receipt by the Company of an undertaking by or on behalf of such Covered Person to repay such amount if it shall be ultimately determined that such Covered Person is not entitled to be indemnified by the Company as authorized by this Article 8.

c. Insurance . The Board in its discretion shall have the power to cause the Company to purchase and maintain insurance in accordance with, and subject to, the Act and Banking Law.

d. Amendments . Any repeal or modification of this Article 8 by the Member shall not adversely affect any rights of such Covered Person pursuant to this Article 8, including the right to indemnification and to the advancement of expenses of a Covered Person existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.

ARTICLE 9

Miscellaneous

a. Tax Treatment . Unless otherwise determined by the Member, the Company shall be a disregarded entity for U.S. federal income tax purposes (as well as for any analogous state or local tax purposes), and the Member and the Company shall timely make any and all necessary elections and filings for the Company to be treated as a disregarded entity for U.S. federal income tax purposes (as well as for any analogous state or local tax purposes).

b. Amendments . Amendments to this Agreement and to the Certificate of Formation shall be approved in writing by the Member. An amendment shall become effective as of the date specified in the approval of the Member or if none is specified as of the date of such approval or as otherwise provided in the Act.

c. Severability . If any provision of this Agreement is held to be invalid or unenforceable for any reason, such provision shall be ineffective to the extent of such invalidity or unenforceability; provided, however, that the remaining provisions will continue in full force without being impaired or invalidated in any way unless such invalid or unenforceable provision or clause shall

 

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be so significant as to materially affect the expectations of the Member regarding this Agreement. Otherwise, any invalid or unenforceable provision shall be replaced by the Member with a valid provision which most closely approximates the intent and economic effect of the invalid or unenforceable provision.

d. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of laws thereof.

e. Limited Liability Trust Company . The Member intends to form a limited liability trust company and does not intend to form a partnership under the laws of the State of New York or any other laws.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

ARMOR HOLDING II LLC , as sole member
By:  

/s/ Martin G. Flanigan

 

Name: Martin G. Flanigan

Title: Chief Financial Officer

 

 

 

[Signature Page to Third Amended and Restated Limited Liability Trust Company Agreement]


EXHIBIT A

[FORM OF CERTIFICATE]

 

Number [*]    Common Interest [*]

AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC

a limited liability trust company formed under the laws of the State of New York

Limited Liability Trust Company Common Interest

[Legend]

THIS CERTIFICATE EVIDENCES COMMON INTERESTS IN THE AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC (THE “COMPANY”) AND SHALL BE A SECURITY FOR PURPOSES OF ARTICLE 8 OF THE UNIFORM COMMERCIAL CODE. THE COMMON INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF THE THIRD AMENDED AND RESTATED LIMITED LIABILITY TRUST COMPANY AGREEMENT OF THE COMPANY DATED AS OF JUNE 29, 2015 (AS MAY BE AMENDED, RESTATED, AMENDED AND RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE “LLTC AGREEMENT”). A COPY OF THE LLTC AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS.

This Certifies that                              is the owner of              fully paid and non-assessable Common Interests of the above-named Company and is entitled to the full benefits and privileges of such Common Interest, subject to the duties and obligations, as more fully set forth in the Agreements. This Certificate is transferable on the books of the Company by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed.

IN WITNESS WHEREOF , the said Limited Liability Company has caused this Certificate, and the Common Interest it represents, to be signed by its duly authorized officer this      day of                  , 20      .

 

By:    

[Name]

[Title]

 

[Exhibit A to Third Amended and Restated Limited Liability Trust Company Agreement]


EXHIBIT T-1.6

September 28, 2018

Securities and Exchange Commission

Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321 (b) of the Trust Indenture Act of 1939, and subject to the limitations therein contained, American Stock Transfer & Trust Company, LLC hereby consents that reports of examinations of said corporation by Federal, State, Territorial or District authorities may be furnished by such authorities to you upon request therefor.

 

Very truly yours,
AMERICAN STOCK TRANSFER
& TRUST COMPANY, LLC
By:  

/s/ Paul H. Kim

 

Name: Paul H. Kim

Title: Assistant General Counsel


EXHIBIT T-1.7

 

LOGO


LOGO

Exhibit h

GREAT ELM CAPITAL CORP.

$[•] [•]% Notes Due 20[•]

UNDERWRITING AGREEMENT

[•], 2018

Ladenburg Thalmann & Co. Inc.

As representative of the several underwriters named in Exhibit A

277 Park Avenue, 26th Floor

New York, NY10172

Ladies and Gentlemen:

Great Elm Capital Corp., a Maryland corporation (the Company ”), and Great Elm Capital Management, Inc., a Delaware corporation (the “ Adviser ”), each confirms with Ladenburg Thalmann & Co. Inc. (“ Ladenburg ”) and each of the other underwriters named in Exhibit A hereto (collectively, the “ Underwriters ,” which term shall also include any underwriter substituted as provided in Section  8 hereof), for whom Ladenburg is acting as the representative (in such capacity, the “ Representative ”) with respect to the issuance and sale by the Company of $[•] aggregate principal amount (the “ Initial Securities ”) of the Company’s [•]% Notes due 20[•], and the purchase by the Underwriters, acting severally and not jointly, of the respective aggregate principal amount of Initial Securities set forth opposite their respective names in Exhibit A hereto, and with respect to the grant by the Company to the Underwriters of the option described in Section  3(b) hereof to purchase all or any part of an additional $[•] aggregate principal amount (the “ Option Securities ”) of the Company’s [•]% Notes due 20[•] solely to cover over-allotments, if any. The Initial Securities to be purchased by the Underwriters and all or any part of the Option Securities are hereinafter called, collectively, the “ Securities .”

The Company has entered into an investment management agreement, dated as of September 27, 2016 (the “ Investment Advisory Agreement ”), with the Adviser. The Company has entered into an administration agreement, dated as of September 27, 2016 (the “ Administration Agreement ”), with the Adviser.

The Securities will be issued under an indenture (the “ Base Indenture ”), dated as of September 18, 2017, between the Company and American Stock & Trust Company, LLC, trustee (the “ Trustee ”), as supplemented by a third supplemental indenture (the “ Third Supplemental Indenture ” and, together with the Base Indenture, the “ Indenture ”), to be dated on or about [•], 2018, between the Company and the . The Securities will be issued as fully registered securities to Cede & Co. (or such other name as may be requested by an authorized representative of The Depository Trust Company (“ DTC ”)), as nominee of DTC, pursuant to a blanket letter of representations, dated August 11, 2017 (the “ DTC Agreement ”), between the Company and DTC.

The Company has filed, pursuant to the Securities Act of 1933, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “ 1933 Act ”), with the U.S. Securities and Exchange Commission (the “ Commission ”) a registration statement on Form N-2 (File No. [•]), which registers the offer and sale of the Securities. The registration statement as amended, including the exhibits and schedules thereto, at the time it became effective on [•], 2018 and any post-effective amendment thereto and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 497 under the 1933 Act (“ Rule 497 ”) with respect to the offer, issuance and/or sale of the Securities and deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A under the 1933 Act, and also including any registration statement relating to the Securities filed


pursuant to Rule 462(b) under the 1933 Act (a “ Rule 462(b) Registration Statement ”), is hereinafter referred to as the “ Registration Statement .” The prospectus included in the Registration Statement at the time it became effective on [•], 2018 is hereinafter referred to as the “ Preliminary Prospectus .” “ Prospectus ” means the prospectus containing all information omitted from the Preliminary Prospectus pursuant to Rule 430A under the 1933 Act which will be filed with the Commission pursuant to Rule 497. Any reference herein to the Registration Statement, the Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rule 497 and prior to the termination of the offering of the Securities by the Underwriters.

All references in this Agreement to the Registration Statement, the Prospectus or any amendments or supplements to any of the foregoing shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (EDGAR).

In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereby agree as follows:

1. Representations and Warranties of the Company and the Adviser . The Company and the Adviser, jointly and severally, represent and warrant to and agree with the Underwriters as of the Applicable Time, as of the Closing Date and as of each Option Closing Date (as such terms are defined in Sections 1(a) , 3(c) and 3(b) , respectively, hereof), as follows:

(a) Registration Statement; Misstatements and Omissions. The Registration Statement on Form N-2 (File No. [•]) with respect to the Securities has been prepared by the Company in conformity with the requirements of the 1933 Act, has been filed with the Commission and has been declared effective. The Company meets the requirements of and complies with the conditions for the use of Form N-2 under the 1933 Act. Copies of the Registration Statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the 1933 Act) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to the Representative. As of the Applicable Time, the Preliminary Prospectus and the information included in Exhibit B hereto, all considered together (collectively, the “ General Disclosure Package ”), did not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the General Disclosure Package or the Registration Statement in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters through the Representative, specifically for use therein, it being understood and agreed that the only such information is that described in Section  7 herein. As of the date set forth on its cover page (solely in the case of the Prospectus), the Closing Date and each Option Closing Date, the General Disclosure Package and the Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement, the General Disclosure Package or the Prospectus in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters through the Representative, specifically for use therein, it being understood and agreed that the only such information is that described in Section  7 herein. As used in this subsection and elsewhere in this Agreement, the term “ Applicable Time means [•] p.m. (New York City time) on the date of this Agreement or such other time as agreed to by the Company and the Representative.

The Commission has not issued an order preventing or suspending the use of the Registration Statement, the Preliminary Prospectus or the Prospectus relating to the proposed offering of the Securities, and no proceeding for that purpose or pursuant to Section 8A of the 1933 Act has been instituted or, to the Company’s knowledge, threatened by the Commission. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto contain and will contain, all statements which are required to be stated therein by, and conform and will conform to the

 

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requirements of, the 1933 Act. At the respective times the Registration Statement and any post-effective amendments thereto became effective and as of the Applicable Time, the Closing Date and each Option Closing Date (if any), the Registration Statement did not, and will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement and the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters through the Representative, specifically for use therein, it being understood and agreed that the only such information is that described in Section  7 herein.

(b) Incorporation and Good Standing of the Company. The Company is a Maryland corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or the ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or to be in good standing, individually or in the aggregate, would not have, or reasonably be expected to have, a material adverse effect on (i) the business, assets, prospects, properties, financial condition or results of operations of the Company and its affiliates, taken as a whole, or (ii) the power or ability of the Company to perform its obligations under this Agreement, the Indenture, the Securities and the DTC Agreement (the occurrence of any such effect or any such prevention described in the foregoing clauses (i) and (ii) being referred to as a “ Material Adverse Effect ”)).

(c) Incorporation and Good Standing of Subsidiaries . Each “significant subsidiary” of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a “ Subsidiary ” and collectively, the “ Subsidiaries ”) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of such Subsidiary’s business or the ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or to be in good standing, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.

(d) Authorization of Underwriting Agreement . This Agreement has been duly authorized, executed and delivered by the Company.

(e) Authorization of Indenture. The Base Indenture has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or law) (collectively, the “ Enforceability Exceptions ”). The Third Supplemental Indenture has been duly authorized, and at the Closing Date, will be executed and delivered by the Company and when duly authorized, executed and delivered by the Trustee will constitute a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by the Enforceability Exceptions.

(f) Authorization of DTC Agreement . The DTC Agreement has been duly authorized, executed and delivered by the Company and is a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforcement, to the Enforceability Exceptions.

(g) Authorization and Description of the Securities . The Securities have been duly authorized by the Company for sale to the Underwriters pursuant to this Agreement and, when executed and delivered by the Company and authenticated by the Trustee pursuant to the provisions of this Agreement and of the Indenture relating thereto, against payment of the consideration set forth in this Agreement, will be valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, subject, as to enforcement, to the Enforceability Exceptions, and will be entitled to the benefits of the Indenture relating thereto. The Securities and the Indenture will conform in all material respect to the statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus.

 

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(h) Qualification of Indenture . The Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended.

(i) Capital Stock. The Company has the authorized equity capitalization set forth under the caption “Capitalization” in the Registration Statement. All outstanding capital stock of the Company has been duly authorized and validly issued, is fully paid and nonassessable and was not issued in violation of any preemptive or similar rights.

(j) No Violation of Existing Laws or Instruments . Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, none of the Company or its Subsidiaries is or, with the giving of notice or lapse of time or both, will be as of the Applicable Time, the Closing Date and any Option Closing Date, in violation or default of (i) any of the provisions of the organizational or governing documents of the Company or the applicable Subsidiary, (ii) any U.S. or non-U.S. law, rule or regulation applicable to the Company or the applicable Subsidiary, (iii) any order, judgment or decree applicable to the Company or the applicable Subsidiary, or by which any property or asset of the Company or the applicable Subsidiary may be bound or (iv) any of the terms and provisions of any loan or credit agreement, indenture, mortgage note or other agreement or instrument to which the Company is a party or by which the Company or any of its properties or assets is or may be bound; except with respect to clauses (ii) and (iv) above, for such violations or defaults that would not reasonably be expected to have a Material Adverse Effect.

(k) No Conflicts . The execution, delivery and performance by the Company of this Agreement, the Indenture, the Securities and the DTC Agreement and the consummation of the transactions contemplated hereby and compliance by the Company with its obligations hereunder and thereunder do not and will not (i) conflict with or result in a violation of any of the provisions of the organizational or governing documents of the Company, (ii) conflict with or violate any U.S. or non-U.S. law, rule or regulation applicable to the Company, (iii) conflict with or violate any order, judgment or decree applicable to the Company or by which any property or asset of the Company is or may be bound or (iv) result in a breach of any of the terms or provisions of, or constitute a default (with or without due notice and/or lapse of time) under, any loan or credit agreement, indenture, mortgage, note or other agreement or instrument to which the Company is a party or by the Company or any of its properties or assets is or may be bound; except with respect to clauses (ii) and (iv) above, for such violations, or defaults that would not reasonably be expected to have a Material Adverse Effect.

(l) No Further Authorizations or Approvals Required . No applicable judgments, decrees, consents, authorizations, approvals, orders, exemptions, registrations, qualifications or other actions of, or filing with or notice to, any governmental authority, the Commission or any other U.S. or non-U.S. regulatory or governmental authority (collectively, “ Approvals ”) are required in connection with the execution and delivery by the Company of this Agreement, the Indenture, the Securities and the DTC Agreement and the consummation of the transactions herein contemplated, except for (i) such Approvals which, considering all such Approvals in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, (ii) those that have been made or obtained, (iii) any post-effective amendment to the Registration Statement adding certain documents related to the offering of the Securities as exhibits thereto, and (iv) filings as may be (x) required by the Financial Industry Regulatory Authority (“ FINRA ”); (y) required by the Nasdaq Global Market (“ NASDAQ ”) in connection with the listing of the Securities; or (z) necessary to qualify the Securities for public offering by the Underwriters under state securities or Blue Sky laws.

(m) No Material Changes. Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, there has not been (i) any material adverse change in the business, prospects, properties or assets, or in the results of operations, condition (financial or otherwise), business or operations of the Company and its Subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, or (ii) except as otherwise expressly disclosed in the Registration Statement, the General Disclosure Package

 

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and the Prospectus, (A) any transaction that is material to the Company or its Subsidiaries, taken as a whole, planned or entered into by the Company or any of its Subsidiaries, (B) any obligation, direct or contingent, that is material to the Company and its Subsidiaries, incurred by the Company or its Subsidiaries, taken as a whole, except obligations incurred in the ordinary course of business, (C) any material change in the capital stock or outstanding indebtedness of the Company or its Subsidiaries or (D) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company.

(n) No Material Actions or Proceedings . There is no action, suit, proceeding, inquiry or investigation pending or, to the knowledge of the Company, threatened in writing against the Company before or brought by any court or other governmental authority or arbitration board or tribunal, which is required to be disclosed in the Registration Statement, the General Disclosure Package or the Prospectus (other than as disclosed therein), or which might, individually, or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(o) Descriptions of Proceedings . All legal or governmental proceedings, agreements, instruments or other documents or arrangements of a character required to be described in the Registration Statement, the General Disclosure Package and the Prospectus or to be filed as exhibits to the Registration Statement have been so described or filed as required.

(p) Independent Accountants. Each of Deloitte & Touche LLP and RSM US LLP, each of whom has certified certain financial statements of the Company or Full Circle Capital Corporation filed with the Commission as part of the Registration Statement, the General Disclosure Package and the Prospectus, is an independent registered public accounting firm with respect to the Company and its Subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board (United States) and as required by the Securities Exchange Act of 1934, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “ Exchange Act ”).

(q) Preparation of Financial Statements . The financial statements (including the related notes) of the Company contained in the Registration Statement, the General Disclosure Package and the Prospectus comply as to form in all material respects with the applicable requirements under the 1933 Act and the Exchange Act; such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and fairly present in all material respects the financial position of the entities purported to be covered thereby at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated; and the financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus is derived from the accounting records of the Company and its Subsidiaries and fairly presents in all material respects the information purported to be shown thereby. No other financial statements or supporting schedules are required to be included in the Registration Statement, the General Disclosure Package and the Prospectus.

(r) Disclosure Controls and Procedures . The Company maintains an effective system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act) that is designed to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act and that such information is communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure. The Company has carried out evaluations of the effectiveness of their disclosure controls and procedures as required by Rule 13a-15 of the Exchange Act.

(s) Internal Control Over Financial Reporting . The Company maintains systems of “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with

 

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generally accepted accounting principles, including, but not limited to internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. There are no material weaknesses in the Company’s internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (x) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (y) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

(t) Intellectual Property Rights . The Company and each of its Subsidiaries own or possess, or can acquire on reasonable terms, sufficient trademarks, trade names, patent rights, copyrights, domain names, licenses, approvals, trade secrets and other similar rights (collectively, “ Intellectual Property Rights ”) reasonably necessary to conduct their businesses as now conducted, or if such Intellectual Property Rights are not possessed such absence would not reasonably be expected to result in a Material Adverse Effect. The expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has received any written notice of infringement or conflict with asserted Intellectual Property Rights of others, which (if subject to any unfavorable decision, ruling or finding or invalidity or unenforceability), singly or in the aggregate, would result in a Material Adverse Effect.

(u) All Necessary Permits , etc. The Company and each of its Subsidiaries possess such valid and current licenses, certificates, authorizations, consents, approvals or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect, and neither the Company nor any Subsidiary is in violation of, in default under, or has received, or has any reason to believe that it will receive, any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such licenses, certificates, authorizations, consents, approvals or permits which, if the subject of an unfavorable decision, ruling or finding, singly or in the aggregate, would reasonably be expected to result in a Material Adverse Effect.

(v) Title to Property . The Company and each of its Subsidiaries has good and marketable title to all of the real and personal property and other assets reflected in the consolidated financial statements hereinabove described or described in the Registration Statement, the General Disclosure Package and the Prospectus, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, adverse claims and other defects, except as would not reasonably be expected, singly or in the aggregate, to result in a Material Adverse Effect.

(w) Tax Law Compliance . The Company and its consolidated Subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns or have properly requested extensions thereof and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them except as may be being contested in good faith and by appropriate proceedings. The Company has made adequate charges, accruals and reserves in its financial statements in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its Subsidiaries has not been finally determined.

(x) Insurance . Each of the Company and its Subsidiaries are insured with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its Subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any Subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Effect.

 

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(y) Company Not an Investment Company . The Company is not required to register as an “investment company” within the meaning of the Investment Company Act of 1940, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “ 1940 Act ”), and the rules and regulations of the Commission thereunder.

(z) ERISA Compliance . The Company and each Subsidiary is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ ERISA ”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company and each Subsidiary would have any material liability; the Company and each Subsidiary has not incurred and does not expect to incur any material liability (i) under Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) for failure to meet the requirements of Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “ Code ”); and each “pension plan” for which the Company or any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would reasonably be expected to cause the loss of such qualification.

(aa) Employees . Other than PF Facilities Solutions, LLC, neither the Company nor any of its Subsidiaries has any employees.

(bb) Foreign Corrupt Practices Act . Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or any of its Subsidiaries is aware of or has taken any action, directly or indirectly, that has resulted or would result in a violation of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “ FCPA ”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA; and the Company and its Subsidiaries and, to the knowledge of the Company, the Company’s affiliates have conducted their respective businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(cc) Money Laundering Laws . The operations of the Company and its Subsidiaries are, and have been conducted at all times, in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar applicable rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending.

(dd) Office of Foreign Assets Control . Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company or any of its Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”), and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

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(ee) Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith, including Section 402 related to loans and Sections 302 and 906 related to certifications.

(ff) Portfolio Companies. Other than due to the acquisition or disposition of investments in the ordinary course of the Company’s business since June 30, 2018, the Company has duly authorized, executed and delivered and currently is a party to or payee with respect to the promissory notes and other agreements (each, a Portfolio Company Agreement ”) evidencing the investments described in the Registration Statement, the General Disclosure Package and the Prospectus under the caption “The Company—Our Portfolio at June 30, 2018” with corporations or other entities (each, a “ Portfolio Company ”). Except as otherwise disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, to the Company’s knowledge, each Portfolio Company is current in all material respects with all its obligations under the applicable Portfolio Company Agreements, no event of default (or a default which with the giving of notice or the passage of time would become an event of default) has occurred under such agreements, except to the extent that any such failure to be current in its obligations and any such default would not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, as of the respective dates set forth therein, (i) the Company does not control (as such term is defined in Section 2(a)(9) of the 1940 Act) any of the Portfolio Companies and (ii) other than the Portfolio Companies and investments acquired in the ordinary course of the Company’s business since June 30, 2018, the Company does not own any investments.

(gg) 1940 Act Compliance . The terms of the Investment Advisory Agreement, including compensation terms, comply in all material respects with all applicable provisions of the 1940 Act and the Investment Advisers Act of 1940, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “ Advisers Act ”), and the approvals by the board of directors and the Company’s stockholders, as applicable, of the Investment Advisory Agreement have been obtained in accordance with the requirements of Section 15 of the 1940 Act applicable to companies that have elected to be regulated as business development companies under the 1940 Act. This Agreement is not subject to the procedural requirements of Section 15 of the 1940 Act.

(hh) BDC Election. The Company has elected to be regulated as a business development company under the 1940 Act and has filed with the Commission, pursuant to Section 54(a) of the 1940 Act, a duly completed and executed Form N-54A (the “ Company BDC Election ”); the Company has not filed with the Commission any notice of withdrawal of the Company BDC Election pursuant to Section 54(c) of the 1940 Act; the Company BDC Election remains in full force and effect and, to the Company’s actual knowledge, no order of suspension or revocation of such election under the 1940 Act has been issued or proceedings therefor initiated or threatened by the Commission. The operations of the Company are in compliance with the provisions of the 1940 Act applicable to business development companies, except where such non-compliance would not reasonably be expected to result in a Material Adverse Effect. As of the date of this Agreement the Company is, and on a pro forma basis, after giving effect to the issuance and sale of the Securities and the use of proceeds therefrom the Company will be, in compliance with the applicable asset coverage requirements set forth in Sections 18 and 61 of the 1940 Act.

(ii) RIC Status. The Company is currently organized and operates in compliance in all material respects with the requirements to be taxed as, and has duly elected to be taxed as (which election has not been revoked), a regulated investment company under Subchapter M of the Code. The Company intends to direct the investment of the net proceeds received by it from the sale of the Securities in the manner specified in the Registration Statement, the General Disclosure Package and the Prospectus under the caption “Use of Proceeds” and in such a manner as to continue to comply with the requirements of Subchapter M of the Code.

(jj) Related Party Transactions . There are no relationships or related-party transactions involving the Company or any of the Subsidiaries or any other person required to be described in the Registration Statement, the General Disclosure Package or the Prospectus which have not been described as required.

 

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(kk) Offering Materials. The Company has not, directly or indirectly, distributed and will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement, the General Disclosure Package and the Prospectus or other materials, if any, permitted by the 1933 Act and the 1940 Act.

(ll) No Association with FINRA . To the Company’s knowledge, there are no affiliations or associations between any member of FINRA and any of the Company’s officers, directors or 5% or greater security holders except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus.

(mm) No Stabilization. Neither the Company, nor to the Company’s knowledge, any of its affiliates, has taken or will take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. The Company acknowledges that the Underwriters may engage in passive market-making transactions in the Securities on NASDAQ in accordance with Regulation M under the Exchange Act.

(nn) Data. The statistical, industry-related and market-related data, if any, included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources which the Company reasonably and in good faith believes are reliable and accurate, and such data agree with the sources from which they are derived.

(oo) Sales Material. Any advertising, sales literature or other promotional material (including “prospectus wrappers,” “broker kits,” “road show slides,” “road show scripts” and “electronic road show presentations”) authorized in writing by or prepared by the Company to be used in connection with the public offering of the Securities (collectively, “ Sales Material ”) do not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. Moreover, all Sales Material complies and will comply in all material respects with the applicable requirements of the 1933 Act (except that this representation and warranty does not apply to statements in or omissions from the Sales Material made in reliance upon and in conformity with information relating to the Underwriters furnished to the Company by the Underwriters expressly for use therein).

Any certificate signed by any officer of the Company or the Adviser and delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or the Adviser (as applicable) to the Underwriters as to the matters covered thereby.

2. Representations and Warranties of the Adviser . The Adviser represents and warrants to the Underwriters as of the date of this Agreement, as of the Applicable Time, as of the Closing Date and as of each Option Closing Date, and agrees with the Underwriters as follows:

(a) Incorporation and Good Standing of the Adviser . The Adviser is a Delaware corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or the ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or to be in good standing, individually or in the aggregate, would not have, or reasonably be expected to have, a material adverse effect on (1) the business, assets, prospects, properties, financial condition or results of operation of the Adviser or (2) the power or ability of the Adviser to perform its obligations under this Agreement, the Investment Advisory Agreement or the Administration Agreement (an “ Adviser Material Adverse Effect ”).

 

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(b) No Material Changes . Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, except as otherwise stated therein, there has not been (i) any material adverse change in the business, prospects, properties or assets described or referred to in the Registration Statement, the General Disclosure Package and the Prospectus, or in the results of operations, condition (financial or otherwise), business or operations of the Adviser, whether or not arising in the ordinary course of business, or (ii) except as otherwise expressly disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, (A) any transaction that is material to the Adviser planned or entered into by the Adviser or (B) any obligation, direct or contingent, that is material to the Adviser and its subsidiaries, incurred by the Adviser, except obligations incurred in the ordinary course of business.

(c) No Violation of Existing Laws or Instruments . The Adviser is not and, with the giving of notice or lapse of time or both, will it not be as of the Applicable Time, the Closing Date and any Option Closing Date, in violation or default of (i) any of the provisions of the organizational or governing documents of the Adviser, (ii) any U.S. or non-U.S. law, rule or regulation applicable to the Adviser, (iii) any order, judgment or decree applicable to the Adviser, or by which any property or asset of the Adviser may be bound or (iv) any of the terms and provisions of any loan or credit agreement, indenture, mortgage note or other agreement or instrument to which the Adviser is a party or by which the Adviser or any of its properties or assets is or may be bound; except with respect to clauses (ii) and (iv) above, for such violations or defaults that would not reasonably be expected to have an Adviser Material Adverse Effect.

(d) No Conflicts . The execution, delivery and performance by the Adviser of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Adviser with its obligations hereunder do not and will not (i) conflict with or result in a violation of any of the provisions of the organizational or governing documents of the Adviser, (ii) conflict with or violate any U.S. or non-U.S. law, rule or regulation applicable to the Adviser, (iii) conflict with or violate any order, judgment or decree applicable to the Adviser or by which any property or asset of the Adviser is or may be bound or (iv) result in a breach of any of the terms or provisions of, or constitute a default (with or without due notice and/or lapse of time) under, any loan or credit agreement, indenture, mortgage, note or other agreement or instrument to which the Adviser is a party or by the Adviser or any of its properties or assets is or may be bound; except with respect to clauses (ii) and (iv) above, for such violations or defaults that would not reasonably be expected to have an Adviser Material Adverse Effect.

(e) No Material Actions or Proceedings . There is no action, suit, proceeding, inquiry or investigation pending or, to the knowledge of the Adviser, threatened in writing against the Adviser before or brought by any court or other governmental authority or arbitration board or tribunal which (1) is required to be disclosed in the Registration Statement, the General Disclosure Package or the Prospectus (other than as disclosed therein) or (2) might individually or in the aggregate, reasonably be expected to have an Adviser Material Adverse Effect or a material adverse effect on the power or ability of the Adviser to perform its obligations under this Agreement, the Investment Advisory Agreement or the Administration Agreement, except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus.

(f) No Further Authorizations or Approvals Required . No Approvals are required in connection with the execution and delivery by the Adviser of this Agreement and the consummation of the transactions herein contemplated, except for (i) such Approvals which, considering all such Approvals in the aggregate, would not reasonably be expected to result in an Adviser Material Adverse Effect and (ii) those that have been made or obtained.

(g) Advisers Act. The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the 1940 Act from acting under the Investment Advisory Agreement for the Company. There does not exist any proceeding or, to the Adviser’s knowledge, any facts or circumstances the existence of which could reasonably be expected to lead to any proceeding, which might adversely affect the registration of the Adviser with the Commission.

(h) Description of Adviser . The descriptions of the Adviser contained in the Registration Statement, the General Disclosure Package and the Prospectus do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.

 

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(i) Due Authorization . This Agreement, the Investment Advisory Agreement and the Administration Agreement have been duly authorized, executed and delivered by the Adviser. The Investment Advisory Agreement and the Administration Agreement are valid and binding obligations of the Adviser, enforceable against them in accordance with their terms, except as the enforcement thereof may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or law).

(j) Information Technology. The Adviser maintains data processing, communications and other technology systems sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iii) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Adviser has adopted policies and procedures reasonably designed to prevent data breaches and other breaches of applicable privacy laws.

(k) Labor Matters . The Adviser is not aware that (i) any executive, key employee or significant group of employees of the Adviser (to the extent any such person devotes substantive attention to matters involving the Company) plans to terminate employment with the Adviser, or (ii) any such executive or key employee is subject to any non-compete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company or the Adviser except where such termination or violation would not reasonably be expected to have an Adviser Material Adverse Effect.

(l) All Necessary Permits , etc . The Adviser possesses such valid and current licenses, certificates, authorizations, consents, approvals or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct its businesses, except where the failure so to possess would not, singly or in the aggregate, result in an Adviser Material Adverse Effect, and the Adviser is not in violation of, in default under, or has received, or has any reason to believe that it will receive, any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such licenses, certificates, authorizations, consents, approvals or permits which, if the subject of an unfavorable decision, ruling or finding, singly or in the aggregate, would reasonably be expected to result in an Adviser Material Adverse Effect.

3. Purchase, Sale and Delivery of the Securities .

(a) On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Company hereby agrees to sell to the Underwriters the respective aggregate principal amount of Initial Securities set forth opposite the name of the Underwriter in Exhibit A hereto, and each Underwriter, severally and not jointly, agrees to purchase the respective aggregate principal amount of Initial Securities set forth opposite the name of such Underwriter on Exhibit A hereto, plus any additional amount of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section  8 hereof, subject to such adjustments among the Underwriters as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional Securities, in each case at a purchase price of [•]% of such aggregate principal amount (the “ Purchase Price ”).

(b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional $[•] aggregate principal amount of Securities at a price equal to the Purchase Price (without giving effect to any accrued interest from the Closing Date to the applicable Option Closing Date). The option granted by this Section 3(b) may be exercised only to cover over-allotments in the sale of the Initial Securities by the Underwriters. The option hereby granted will expire at 11:59 P.M. (New York City time) on the 30th day

 

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after the date hereof and may be exercised on up to three occasions in whole or in part only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representative to the Company setting forth the aggregate principal amount of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (an “ Option Closing Date ”) shall be determined by the Representative, but shall not be earlier than three or later than seven full business days after the exercise of said option, unless otherwise agreed upon by the Company and the Representative, nor in any event prior to the Closing Date. If the option is exercised as to all or any portion of the Option Securities, the Company will sell to the Underwriters that proportion of the total aggregate principal amount of Option Securities then being purchased, and each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total aggregate principal amount of Option Securities then being purchased, which the aggregate principal amount of Initial Securities set forth in Exhibit A opposite the name of such Underwriter, plus any additional amount of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section  8 hereof, bears to the total aggregate principal amount of Initial Securities, subject in each case to such adjustments as the Representative in its discretion shall make to eliminate any sales or purchases of fractional Securities.

(c) Payment of the purchase price for, and delivery of any certificates for, the Initial Securities shall be made at the offices of Dechert LLP at One International Place, 100 Oliver Street, Boston, Massachusetts 02110 or at such other place as shall be agreed upon by the Representative and the Company, at 10:00 A.M. (New York City time) on [•], 2018 (unless postponed in accordance with the provisions of Section  8), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called the “ Closing Date ”).

In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the Purchase Price for, and delivery of any certificates for, such Option Securities shall be made at 10:00 A.M. (New York City time) at the above-mentioned offices, or at such other place as shall be agreed upon by the Representative and the Company, on each Option Closing Date.

Payment shall be made to the Company by wire transfer of immediately available funds to a single bank account designated by the Company against delivery to the Representative for the respective accounts of the Underwriters of the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. The Representative, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Date or the relevant Option Closing Date, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.

(d) Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representative may request in writing at least two full business days before the Closing Date or the relevant Option Closing Date, as the case may be.

4. Expenses . The Company agrees to pay the reasonable costs and expenses relating to the following matters: (i) the preparation, printing or reproduction and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto) and the Prospectus, and each amendment or supplement to either of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the General Disclosure Package, and the Prospectus, and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in connection with the offering and sale of the Securities; (iii) the costs and expenses incurred by the Company arising out of the marketing of the sale of the Securities to investors; (iv) the preparation, printing, authentication, issuance and delivery of certificates for the Securities; (v) qualifying the Notes for inclusion in the book-entry settlement system of DTC, (vi) the fees and

 

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disbursements of the Trustee, (vii) the printing (or reproduction) and delivery of this Agreement, any blue sky memorandum and all closing documents printed (or reproduced) and delivered in connection with the offering of the Securities; (viii) the listing of the Securities on NASDAQ; (ix) any registration or qualification of the Securities for offer and sale under the securities or blue sky laws of the several states of the United States (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such registration and qualification); (x) any filings required to be made with FINRA (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such filings); (xi) the fees and expenses of the Company’s accountants and the fees and expenses of counsel (including Maryland Counsel (as defined below)) for the Company; and (xii) all other reasonable costs and expenses incurred by the Company or the Adviser incident to the performance by the Company of its obligations hereunder.

5. Agreements of the Company . The Company agrees with the Underwriters that:

(a) Prior to the termination of the offering of the Securities, the Company will not file any amendment of the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Company has furnished the Representative a copy for its review prior to filing and will not file any such proposed amendment, supplement or Rule 462(b) Registration Statement to which the Representative reasonably objects. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A under the 1933 Act, or filing of the Prospectus is otherwise required under Rule 497, the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed in a form approved by the Representative with the Commission pursuant to Rule 497 within the time period prescribed and will provide evidence satisfactory to the Representative of such timely filing. The Company will promptly advise the Representative (1) when the Prospectus, and any supplement thereto, will have been filed (if required) with the Commission pursuant to Rule 497 or when any Rule 462(b) Registration Statement will have been filed with the Commission, (2) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement will have been filed or become effective, (3) of any request by the Commission or its staff for any amendment of the Registration Statement or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or for any additional information, (4) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or, to the knowledge of the Company, threatening of any proceeding for that purpose and (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose. The Company will use reasonable efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof.

(b) The Company will comply with the requirements of Rule 430A under the 1933 Act and will notify the Representative immediately, and confirm the notice in writing, of (i) the effectiveness of any post-effective amendment to the Registration Statement or any new registration statement relating to the Securities or the filing of any supplement or amendment to the Prospectus, (ii) the receipt of any comments from the Commission, (iii) any request by the Commission for any amendment to the Registration Statement or the filing of a new registration statement or any amendment or supplement to the Prospectus or for additional information, (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or such new registration statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will promptly effect the filings required under Rule 497, in the manner and within the time period required by Rule 497, notify the Representative of the filing thereof, and take such steps as it deems necessary to ascertain promptly whether the Prospectus transmitted for filing under Rule 497 was received for filing by the Commission and, in the event that it was not, it will promptly file the Prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.

 

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(c) If at any time when the Prospectus is required by the 1933 Act or the Exchange Act to be delivered in connection with sales of the Securities, any event will occur or condition will exist as a result of which it is necessary, in the reasonable opinion of outside counsel to the Underwriters or the Company, to amend the Registration Statement in order that the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or to amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it will be necessary, in the reasonable opinion of such outside counsel, at any such time to amend the Registration Statement, or to amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act, the Company will (i) promptly prepare and file with the Commission, such amendment, supplement or new registration statement as may be necessary to correct such statement or omission or to comply with such requirements, provided that the Company shall not make any filing to which the Representative reasonably objects, (ii) use its best efforts to have such amendment declared effective as soon as practicable, and (iii) furnish to the Representative, without charge, such number of copies of such amendment or supplement as the Representative may reasonably request.

(d) The Company will cooperate with the Representative in endeavoring to qualify the Securities for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose; provided the Company will not be required to qualify as a foreign corporation, to become subject to taxation as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Securities.

(e) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of the Preliminary Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the 1933 Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request.

(f) The Company will comply with the 1933 Act and the Exchange Act so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and the Prospectus.

(g) If the General Disclosure Package is being used to solicit offers to buy the Securities at a time when the Prospectus is not yet available to prospective purchasers and any event will occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the General Disclosure Package in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or to make the statements therein not conflict with the information contained in the Registration Statement then on file, or if it is necessary at any time to amend or supplement the General Disclosure Package to comply with any law, the Company promptly will prepare, file with the Commission (if required) and furnish to the Underwriters and any dealers an appropriate amendment or supplement to the General Disclosure Package.

(h) The Company will make generally available to its security holders, as soon as it is practicable to do so, an earnings statement or statements (which need not be audited), which will satisfy the requirements of Section 11(a) of the 1933 Act and Rule 158 under the 1933 Act and will advise the Representative in writing when such statement has been so made available.

(i) No offering, pledge, sale, contract to sell, grant of any option for the sale of, or other transfer or disposition of any debt securities of the Company or other securities convertible into or exchangeable or exercisable for debt securities of the Company will be made for a period of 90 days after the date of the Prospectus, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Representative.

 

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(j) The Company will apply the net proceeds of its sale of the Securities as set forth in the Registration Statement, the General Disclosure Package and the Prospectus.

(k) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Securities, except as may be allowed by law.

(l) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1933 Act, the Exchange Act and the 1940 Act within the time periods required by such act, rule or regulation. To the extent the distribution of Securities has been completed, the Company will not be required to provide the Underwriters with reports it is required to file with the Commission under the Exchange Act.

(m) The Company will cooperate with the Representative and use its commercially reasonable efforts to permit the offered Securities to be eligible for clearance and settlement through the facilities of DTC.

(n) The Company will use reasonable best efforts to effect the listing of the Notes on NASDAQ within 30 days of the Closing Date.

6. Conditions to the Underwriters’ Obligations . The obligations of the Underwriters to purchase the Securities on the Closing Date and the Option Securities, if any, on the Option Closing Date are subject to the accuracy, as of the Applicable Time, the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Adviser contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions:

(a) The Registration Statement and all post-effective amendments thereto shall have become effective and the Prospectus shall have been filed as required by Rules 430A or 497 under the 1933 Act, as applicable, within the time period prescribed by, and in compliance with the 1933 Act, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to its reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose or pursuant to Section 8A under the 1933 Act shall have been taken or, to the knowledge of the Company, shall be contemplated or threatened by the Commission and no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Securities.

(b) The Representative shall have received from Jones Day, counsel for the Company and the Adviser, an opinion (including a negative assurance statement), dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters in form and substance reasonably satisfactory to the Representative.

(c) The Representative shall have received from Venable LLP, special Maryland counsel for the Company (“ Maryland Counsel ”), an opinion dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, regarding matters relating to Maryland law, in form and substance reasonably satisfactory to the Representative.

(d) The Representative shall have received from Dechert LLP, counsel to the Underwriters (“ Underwriters’ Counsel ”), an opinion and a negative assurance letter, each dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative.

 

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(e) The Representative shall have received, on each of the date hereof, the Closing Date and, if applicable, the Option Closing Date, the letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of Deloitte & Touche LLP, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters, delivered in accordance with Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the financial statements and certain financial and statistical information contained in the Registration Statement, the General Disclosure Package and the Prospectus.

(f) Each of the Company and the Adviser shall have furnished to the Representative, on the Closing Date and, if applicable, the Option Closing Date, as the case may be, a certificate substantially in the form of Exhibit  6(f) .

(g) Each of the Company and the Adviser shall have furnished to the Representative such further certificates and documents as the Representative may reasonably require for the purpose of enabling the Underwriters to pass upon the issuance and sale of the Securities as herein contemplated.

(h) The Company and the Trustee shall have executed and delivered the Third Supplemental Indenture and the Securities.

(i) The application for listing of the Securities shall have been submitted to NASDAQ.

(j) There shall not have been any decrease in the rating of any debt of the Company by any “nationally recognized statistical rating organization” (as defined in Section 3(a)(62) of the Exchange Act), or any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating that does not indicate the direction of the possible change, and no such organization shall have publicly announced it has under surveillance or review any such rating.

The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representative and to Underwriters’ Counsel.

If any of the conditions hereinabove provided for in this Section  6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing at or prior to the Closing Date or the Option Closing Date, as the case may be.

In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 4 and 7 hereof).

7. Indemnification and Contribution .

(a) Indemnification by the Company/Adviser . The Company and the Adviser, jointly and severally, agree to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20(a) of the Exchange Act:

(i) against any and all loss, liability, claim, damage and expense whatsoever, arising out of any untrue or alleged untrue statement of a material fact contained in the Registration Statement for the Securities as originally filed or in any amendment thereof (and including any post-effective amendment), the General Disclosure Package or the Prospectus or in any sales material (or any amendment or supplement to any of the foregoing), or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading;

 

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(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that any such settlement is effected with the written consent of the Company; and

(iii) against any and all expense whatsoever, as incurred (including the reasonable fees and disbursements of counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative expressly for use in the Registration Statement (or any amendment thereto), or the General Disclosure Package, any Preliminary Prospectus or the Prospectus (or any amendment or supplement thereto), it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: (i) their names and (ii) the fourth, sixth, fourteenth and seventeenth paragraphs of text under the caption “Underwriting.”

(b) Indemnification by the Underwriters. Each Underwriter severally agrees to indemnify and hold harmless the Company and the Adviser, each of their respective directors, each of their respective officers who signed the Registration Statement, and each person who controls the Company or the Adviser within the meaning of either Section 15 of the 1933 Act or Section 20(a) of the Exchange Act, to the same extent as the indemnity from the Company and the Adviser to the Underwriters set forth in Section  7(a)(i) and the proviso thereto, but only with reference to written information relating to the Underwriters furnished to the Company by or on behalf of the Underwriters specifically for inclusion in the documents referred to in the foregoing indemnity. The Underwriters agree to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any loss, claim, damage, liability or action to which they are entitled to indemnification pursuant to this Section  7(b) . This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have.

(c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section  7 , such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing. No indemnification provided for in Section  7 shall be available to any party who shall fail to give notice as provided in this Section  7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section  7 . In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the

 

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counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. Such firm shall be designated in writing by the Representative in the case of parties indemnified pursuant to Section  7(a) and by the Company in the case of parties indemnified pursuant to Section  7(b) . The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding.

(d) To the extent the indemnification provided for in Section  7 is unavailable to or insufficient to hold harmless an indemnified party under Section  7(a) or (b)  above in respect of any losses, liabilities, claims, damages or expenses (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Adviser, on the one hand, and the Underwriters, on the other, from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company or the Adviser, on the one hand, and the Underwriters, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Adviser, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case, as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Adviser and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section  7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section  7(d) . The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section  7(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section  7(d) , (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Securities purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

(e) Any contribution by the Company and the Adviser shall be subject to the requirements and limitations of Section 17(i) of the 1940 Act and Investment Company Act Release 11330, as amended or updated.

 

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8. Default by One or More Underwriters. If one or more of the Underwriters shall fail on the Closing Date or an Option Closing Date to purchase the Securities which it or they are obligated to purchase under this Agreement (the “ Defaulted Securities ”), the Representative shall use reasonable best efforts, within 36 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 36-hour period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the aggregate principal amount of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters; or

(b) if the number of Defaulted Securities exceeds 10% of the aggregate principal amount of Securities to be purchased on such date, this Agreement or, with respect to any Option Closing Date which occurs after the Closing Date, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities that were to have been purchased and sold on such Option Closing Date, shall terminate without liability on the part of any non-defaulting Underwriter.

No action taken pursuant to this Section  8 shall relieve any defaulting Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of this Agreement or, in the case of an Option Closing Date which is after the Closing Date, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, the Representative or the Company shall have the right to postpone the Closing Date or the relevant Option Closing Date, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement, the General Disclosure Package or Prospectus or in any other documents or arrangements. As used herein, the term “ Underwriter ” includes any person substituted for an Underwriter under this Section  8 .

9. Termination . This Agreement may be terminated by the Representative by notice to the Company (a) at any time prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to Option Securities) if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, which the Representative deems to materially impair the investment quality of the Securities, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis (including, without limitation, an act of terrorism) or change in economic or political conditions, if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in the judgment of the Representative, materially impair the investment quality of the Securities, (iii) suspension of trading in securities generally on the New York Stock Exchange or NASDAQ or limitation on prices (other than limitations on hours or numbers of days of trading), (iv) the declaration of a banking moratorium by United States or New York State authorities, (v) the suspension of trading of any of the Company’s securities by NASDAQ, the Commission or any other governmental authority or (vi) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in the opinion of the Representative has a material adverse effect on the securities markets in the United States; or (b) as provided in Section  6 of this Agreement.

10. Representations and Indemnities to Survive . The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters or the Company or any of the officers, directors, employees, agents or controlling persons referred to in Section  8 hereof, and will survive delivery of and payment for the Securities. The provisions of Section  4 , Section  7 , Section  10 , Section  13 , Section  15 and Section  16 shall survive the termination or cancellation of this Agreement.

 

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11. Notices . All communications hereunder will be in writing and effective only on receipt, and will be mailed (postage prepaid, certified or registered mail, return receipt requested), delivered or transmitted by any standard form of telecommunication:

 

  (a)

if to the Underwriters:

Ladenburg Thalmann & Co. Inc.

277 Park Avenue, 26th Floor

New York, New York 10172

Attention: Jeffrey Caliva

with an additional copy (which copy shall not constitute notice) to:

Dechert LLP

One International Place

100 Oliver Street

Boston, Massachusetts 02110

(617) 426-6567 (fax)

Attention: Thomas J. Friedmann

 

  (b)

if to the Company or the Adviser:

Great Elm Capital Corp.

800 South Street, Suite 230

Waltham, Massachusetts 02453

Attention: Peter A. Reed

with an additional copy (which copy shall not constitute notice) to:

Jones Day

250 Vesey Street

New York, New York 10281

(212) 755-7306 (fax)

Attention: Rory T. Hood

12. Successors . This Agreement has been and is made solely for the benefit of the Underwriters, the Company, the Adviser and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Securities from any Underwriter shall be deemed a successor or assign merely because of such purchase.

13. No Fiduciary Duty . The Company hereby acknowledges that (a) the offering and sale of the Securities pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriters and any affiliate through which an Underwriter may be acting, on the other, (b) the Underwriters have not assumed an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether any Underwriter has advised or is currently advising the Company on related or other matters), and (c) the Company’s engagement of the Underwriters in connection with the offering and the process leading up to the offering is as independent contractors and not in any other capacity. Furthermore, the Company agrees that it is solely responsible for making its own judgments in connection with the offering (irrespective of whether any Underwriter has advised or is currently advising the Company on related or other matters). The Company agrees that it will not claim that any Underwriter has rendered advisory services of any nature or respect, or owe an agency, fiduciary or similar duty to the Company, in connection with such transaction or the process leading thereto.

 

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14. Integration . This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company and the Underwriters with respect to the subject matter hereof.

15. Applicable Law . This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York.

16. Waiver of Jury Trial . THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

17. Counterparts . This Agreement may be signed in two or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement.

18. Headings . The section headings used herein are for convenience only and shall not affect the construction hereof.

19. Partial Unenforceability . The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.

[Remainder of Page Intentionally Blank]

 

-21-


If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Company, the Adviser and the Underwriters.

 

Very truly yours,
Great Elm Capital Corp.
By:                   
Name:  
Title:  
Great Elm Capital Management, Inc.
By:    
Name:  
Title:  

The foregoing Agreement is hereby confirmed and accepted as of the date first-written above.

 

Ladenburg Thalmann & Co. Inc.
By:                   
Name:  
Title:  

For itself and as Representative of the Underwriters named in Exhibit A hereto

[Signature Page to Underwriting Agreement]


EXHIBIT A

UNDERWRITERS

 

Name of Underwriter

   Aggregate Principal
Amount of Initial Securities
 

Ladenburg Thalmann & Co. Inc.

     [ •] 

[•]

     [ •] 

[•]

     [ •] 
  

 

 

 

Total

     [ •] 
  

 

 

 


EXHIBIT B

PRICE-RELATED INFORMATION

 

Aggregate Principal Amount of Initial Securities:    $[•]
Aggregate Principal Amount of Option Securities:    $[•]

 

Public offering price    [100.0]%
Sales load (underwriting discounts and commissions)    [•]%
Proceeds to the Company, before expenses    [•]%
Pricing Date:    [•], 2018
Closing Date (T+5):    [•], 2018
Interest Rate    [•]%
No Call Period    Closing Date through [•], 20[•]
Stated Maturity    [•], 20[•]


Exhibit 6(f) – Officers’ Certificates

COMPANY OFFICERS’ CERTIFICATE

The undersigned, the duly qualified and elected Chief Executive Officer and Chief Financial Officer of Great Elm Capital Corp., a Maryland corporation (the “ Company ”), do hereby certify in such capacity and on behalf of the Company, pursuant to Section  6(f)  of the Underwriting Agreement dated [•], 2018 (the “ Underwriting Agreement ”) among the Company, Great Elm Capital Management, Inc., a Delaware corporation, and Ladenburg Thalmann & Co. Inc., as representative of the several underwriters named in Exhibit A thereto (collectively, the “ Underwriters ”), providing for the offer and sale by the Company to the Underwriters of up to $[•] aggregate principal amount of the Company’s [•]% notes due 20[•], hereby certify that they are authorized to execute this Officers’ Certificate in the name of and on behalf of the Company. Each of the undersigned also hereby certifies, on behalf of the Company in his respective capacity as Chief Executive Officer or Chief Financial Officer, that:

 

  (i)

the representations and warranties of the Company in the Underwriting Agreement are true and correct in all material respects with the same force and effect as though expressly made at and as of the date hereof;

 

  (ii)

the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the date hereof under or pursuant to the Underwriting Agreement;

 

  (iii)

no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to our knowledge, are contemplated by the Commission; and

 

  (iv)

there has not been, since [•], 2018 or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus (in each case exclusive of any amendments or supplements thereto subsequent to [•], 2018) any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business.

Each of Jones Day and Dechert LLP is entitled to rely upon this certificate in connection with the respective opinions given by such firms pursuant to the Underwriting Agreement.

Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Underwriting Agreement.

 

By:  

 

  Name:   Peter A. Reed
  Title:   Chief Executive Officer
  Date:   [•], 2018
By:  

 

  Name:   John Woods
  Title:   Chief Financial Officer
  Date:   [•], 2018


ADVISER OFFICER’S CERTIFICATE

The undersigned, the duly qualified and elected Chief Investment Officer of Great Elm Capital Management, Inc., a Delaware corporation registered as an investment adviser (the “ Adviser ”), does hereby certify in such capacity and on behalf of the Adviser, pursuant to Section  6(f)  of the Underwriting Agreement dated [•], 2018 (the “ Underwriting Agreement ”) among the Adviser, Great Elm Capital Corp., a Maryland corporation (the “ Company ”), and Ladenburg Thalmann & Co. Inc., as representative of the several underwriters named in Exhibit A thereto (collectively, the “ Underwriters ”), providing for the offer and sale by the Company to the Underwriters of up to $[•] aggregate principal amount of the Company’s [•]% notes due 20[•], that he is authorized to execute this certificate in the name and on behalf of the Adviser. The undersigned also hereby certifies, on behalf of the Adviser in his capacity as Chief Investment Officer of the Adviser, that:

 

  (i)

the representations and warranties of the Adviser in Section  1 and Section  2 of the Underwriting Agreement are true and correct in all material respects on and as of the date hereof, with the same force and effect as if expressly made on and as of the date hereof; and

 

  (ii)

the Adviser has complied with all agreements and satisfied all conditions on its part to be performed or satisfied pursuant to the Underwriting Agreement at or prior to the date hereof.

Each of Jones Day and Dechert LLP is entitled to rely upon this certificate in connection with the respective opinions given by such firms pursuant to the Underwriting Agreement.

Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Underwriting Agreement.

 

By:  

 

  Name:   Peter A. Reed
  Title:   Chief Investment Officer
  Date:   [•], 2018

Exhibit (l)(1)

[Letterhead of Jones Day]

September 28, 2018

Great Elm Capital Corp.

800 South Street, Suite 230

Waltham, Massachusetts 02453

Re: Registration Statement on Form N-2 filed by Great Elm Capital Corp.

Ladies and Gentlemen:

We have acted as counsel for Great Elm Capital Corp., a Maryland corporation (the “ Company ”), in connection with the registration statement on Form N-2 (the “ Registration Statement ”) filed by the Company with the Securities and Exchange Commission (the “ Commission ”) under the Securities Act of 1933, as amended (the “ Securities Act ”), in connection with the registration, issuance and sale under the Securities Act of up to $50,000,000 in aggregate principal amount of the Company’s unsecured notes (the “ Notes ”). We understand that the Notes are to be issued under a base indenture, dated September 18, 2017 (the “ Base Indenture ”), between the Company and American Stock Transfer & Trust Company, LLC, as trustee (the “ Trustee ”), filed as an exhibit to the Registration Statement, as supplemented by a third supplemental indenture (the “ Supplemental Indenture ” and, together with the Base Indenture, the “ Indenture ”), the form of which is filed as an exhibit to the Registration Statement.

In connection with the opinion expressed herein, we have examined such documents, records and matters of law as we have deemed relevant or necessary for purposes of this opinion. Based on the foregoing, and subject to the further limitations, qualifications and assumptions set forth herein, we are of the opinion that the Notes, upon receipt by the Company of such lawful consideration therefor as the Company’s Board of Directors (the “ Board ”) (or an authorized committee thereof) may determine, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.

The opinion set forth above is subject to the following limitations, qualifications and assumptions:

For the purposes of the opinion expressed herein, we have assumed that: (i) the Registration Statement, and any amendments thereto, will have become effective under the Securities Act (and will remain effective at the time of issuance of any Notes thereunder); (ii) a prospectus describing the Notes offered pursuant to the Registration Statement, to the extent required by applicable law and relevant rules and regulations of the Commission, will be timely filed with the Commission; (iii) the definitive terms of the Notes will have been established in accordance with the authorizing resolutions adopted by the Company’s Board (or an authorized committee thereof), the Company’s Amended and Restated Charter and applicable law and will be in full force and effect at all times at which the Notes are offered or sold by the Company; (iv) the Company will issue and deliver the Notes in the manner contemplated by the Registration


Great Elm Capital Corp.

September 28, 2018

Page 2

 

Statement; (v) all Notes will be issued in compliance with applicable federal and state securities laws; (vi) the Indenture will be governed by and construed in accordance with the laws of the State of New York and will constitute a valid and binding obligation of each party thereto other than the Company; (vii) the Supplemental Indenture will have been authorized, executed and delivered by the Company and the Trustee in a form approved by us, and the Indenture will have been qualified under the Trust Indenture Act of 1939; and (viii) the Notes will be executed, authenticated, issued and delivered in accordance with the provisions of the Indenture.

For purposes of our opinion, we also assume that (a) the Company is a corporation existing and in good standing under the laws of the State of Maryland, (b) the Indenture and the Notes have been or will have been (i) authorized by all necessary corporate action of the Company and (ii) executed and delivered by the Company under the laws of the State of Maryland, and (c) the execution, delivery, performance and compliance with the terms and provisions of the Indenture and the Notes by the Company do not violate or conflict with the laws of the State of Maryland, the terms and provisions of the Company’s Amended and Restated Charter or Bylaws, or any rule, regulation, order, decree, judgment, instrument or agreement binding upon or applicable to it or its properties.

The opinion expressed herein is limited by bankruptcy, insolvency, reorganization, fraudulent transfer and fraudulent conveyance, voidable preference, moratorium or other similar laws and related regulations and judicial doctrines from time to time in effect relating to or affecting creditors’ rights generally, and by general equitable principles and public policy considerations, whether such principles and considerations are considered in a proceeding at law or at equity.

As to facts material to the opinion and assumptions expressed herein, we have relied upon oral or written statements and representations of officers and other representatives of the Company and others. The opinion expressed herein is limited to the laws of the State of New York, as currently in effect, and we express no opinion as to the effect of the laws of any other jurisdiction.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to Jones Day under the caption “Legal Matters” in the prospectus constituting a part of such Registration Statement. In giving such consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission promulgated thereunder.

Very truly yours,

/s/ Jones Day

Exhibit (l)(2)

[LETTERHEAD OF VENABLE LLP]

September 28, 2018

Great Elm Capital Corp.

800 South Street, Suite 230

Waltham, Massachusetts 02453

Re: Registration Statement on Form N-2

Ladies and Gentlemen:

We have served as Maryland counsel to Great Elm Capital Corp., a Maryland corporation (the “Company”) and a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”), in connection with certain matters of Maryland law arising out of the registration by the Company of up to $50,000,000 in aggregate principal amount of Notes (the “Notes”) of the Company, covered by the above-referenced Registration Statement (the “Registration Statement”), filed by the Company with the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “1933 Act”) on or about the date hereof.

In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the “Documents”):

1. The Registration Statement and the related form of prospectus included therein, substantially in the form in which it was transmitted to the Commission under the 1933 Act;

2. The charter of the Company, certified by the State Department of Assessments and Taxation of Maryland (the “SDAT”);

3. The Bylaws of the Company, certified as of the date hereof by an officer of the Company;

4. A certificate of the SDAT as to the good standing of the Company, dated as of a recent date;

5. Resolutions (the “Resolutions”) adopted by the Board of Directors of the Company relating to the authorization of the filing of the Registration Statement and the sale and issuance of the Notes, certified as of the date hereof by an officer of the Company;


Great Elm Capital Corp.

September 28, 2018

Page 2

 

6. A certificate executed by an officer of the Company, dated as of the date hereof; and

7. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein.

In expressing the opinion set forth below, we have assumed the following:

1. Each individual executing any of the Documents, whether on behalf of such individual or any other person, is legally competent to do so.

2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so.

3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms.

4. All Documents submitted to us as originals are authentic. The form and content of all Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise.

5. Prior to the issuance of the Notes, the final terms of the Notes will be established in accordance with the Resolutions and the Registration Statement.

Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:

1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT.


Great Elm Capital Corp.

September 28, 2018

Page 3

 

2. The issuance of the Notes has been duly authorized and, when and if issued and delivered against payment therefor in accordance with the Resolutions and the Registration Statement, the Notes will be validly issued.

The foregoing opinion is limited to the laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of the 1940 Act or other federal securities laws, or state securities laws, including the securities laws of the State of Maryland. To the extent that any matter as to which our opinion is expressed herein would be governed by the laws of any jurisdiction other than the State of Maryland, we do not express any opinion on such matter.

The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof.

This opinion is being furnished to you for submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act.

Very truly yours,

/s/ Venable LLP

Exhibit (n)(1)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form N-2 of our report dated March 12, 2018 relating to the financial statements of Great Elm Capital Corp. appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the headings “Selected Consolidated Financial Data” and “Independent Registered Public Accounting Firm” in such Prospectus.

/s/ Deloitte & Touche LLP

McLean, VA

September 28, 2018

Exhibit (n)(2)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form N-2 of Great Elm Capital Corp. of our reports dated September 28, 2016, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Full Circle Capital Corporation and Subsidiaries, appearing in this Registration Statement on Form N-2 filed by Great Elm Capital Corp.

We also consent to the reference to our firm under the heading “Independent Registered Public Accounting Firm” in such Registration Statement.

/s/ RSM US LLP

New York, New York

September 28, 2018