UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _________

Commission file number: 814-01211

Great Elm Capital Corp.

(Exact name of registrant as specified in its charter)

 

Maryland

 

81-2621577

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

200 Clarendon Street, 51st Floor, Boston MA

 

02116

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (617) 375-3006

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

NASDAQ Global Market

 8.25% Notes due 2020

 

NASDAQ Global Market

 

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes       No    

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes       No    

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes       No    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes       No    

The aggregate market value of the voting stock held by non-affiliates of the registrant was zero as of June 30, 2016. Shares of common stock held by persons who are not directors or executive officers, including persons who own more than 5% of the outstanding shares of common stock, are included in that such persons are not deemed to be affiliates for purpose of this calculation.

As of March 24, 2017, there were 12,550,746 outstanding shares of the registrant’s common stock

 

 


TABLE OF CONTENTS

 

PART I

 

Page

 

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

19

Item 1B.

Unresolved Staff Comments

39

Item 2.

Properties

39

Item 3.

Legal Proceedings

40

Item 4.

Mine Safety Disclosures

40

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

40

Item 6.

Selected Financial Data

43

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 8.

Financial Statements and Supplementary Data

53

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

53

Item 9A.

Controls and Procedures

53

Item 9B.

Other Information

54

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

55

Item 11.

Executive Compensation

59

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

60

Item 13.

Certain Relationships and Related Transactions, and Director Independence

61

Item 14.

Principal Accounting Fees and Services

62

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

63

Item 16

10-K Summary

63

 

 

 

Signatures

 

64

 

 

 

i


PAR T I

Unless the context otherwise requires, all references to “GECC,” “we,” “us,” “our,” the “Company” and words of similar import are to Great Elm Capital Corp. and/or its subsidiaries.  We reference materials on our website, www.greatelmcc.com, but nothing on our website shall be deemed incorporated by reference or otherwise contained in this report.

Cautionary Note Regarding Forward-Looking Information

Some of the statements in this report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial conditions. The forward-looking statements contained in this report 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 regulated investment company and as a business development company.

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 report 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 as “Risk Factors”.

We have based the forward-looking statements included in this report on information available to us on the date of this report, 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 Securities and Exchange Commission (the “SEC”).

Item 1. Business

Overview

We are a newly formed, externally managed non‑diversified closed‑end management investment company that elected to be regulated as a business development company (a “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 JOBS Act, and, as

2


such, are subject to reduced public company reporting requirements. 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 in a range of industries, which, our external investment manager, Great Elm Capital Management, Inc. (“GECM”) defines as companies with enterprise values between $100.0 million and $2.0 billion. Our investment objectives may be changed without a vote of the holders of a majority of our stockholders. GECM provides the administrativ e services necessary for us to operate.

We made, and expect to make, multi‑year investments primarily in secured and senior unsecured debt instruments that we purchase in the secondary markets. We may also originate investments directly with issuers. We invest in companies that have high leverage or operate in industries experiencing cyclical declines. Investments in these companies may trade at discounts to their original issue prices. 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. We seek investments whose total return potential (interest income plus capital appreciation and fees, if any) appropriately recognizes potential investment risks. 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. We may also invest in subordinated debt, mezzanine debt, and equity or equity‑linked financial instruments.

Our Portfolio at December 31, 2016

A list of the industries in which we had invested as of December 31, 2016 may be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Set forth below is a brief description of each company representing greater than 5% of the fair market value of our portfolio at December 31, 2016.

Avanti Communications

Avanti Communications Group plc (“Avanti”) is a leading provider of satellite‑enabled data communications services in Europe, the Middle East and Africa. Avanti’s network consists of: two high throughput satellites, HYLAS 1 and HYLAS 2; a multiband satellite, Artemis; two satellites that are not yet launched, HYLAS 3 and HYLAS 4; 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.

Optima Specialty Steel

Optima Specialty Steel, Inc. (“Optima”) is a leading independent manufacturer and processor of special bar quality and merchant bar quality hot rolled steel bars, value‑added precision‑tolerance, cold drawn seamless tubes and high quality engineered cold finished steel bars in the U.S. Optima sells its products directly to original equipment manufacturers, as well as to distributors. Furthermore, Optima sells its products into diversified end markets such as transportation (including automotive), energy (including oil and gas shale extraction), agriculture, power generation and yellow goods/construction equipment end markets.

Pristine Environments

Pristine Environments, Inc. (“PEI”) provided facilities maintenance services to local and national commercial clients. PEI managed, maintained and optimized the performance of mission critical facilities for corporate real estate owners in nearly 100 million square feet of specialized buildings through North America. PEI was headquartered in San Diego, California and had operations nationwide.

Everi Holdings

Everi Holdings Inc. (“Everi”) provides a variety of products and services to the gaming industry in North America, operating in two key business segments (1) the Payments division; and (2) the Games division. In the Payments division, Everi is a market‑share leading provider of payment products and solutions to the casino industry; these products range from ATM and credit card transaction processing to data analytics and full‑service kiosks on the casino floor. In the Games division, Everi generates revenue by selling and leasing slot machines to casino operators.

3


Trilogy International

Trilogy International Partners (“Trilogy”) is a privately held wireless telecom operator based in the U.S., with majority stakes in operating businesses in Bolivia and New Zealand. Trilogy provides data and voice services to cellular customers in Bolivia and New Zealand, and wireline connectivity services to residential customers and enterprises in New Zealand. Trilogy has over 3,700,000 subscribers globally, approximately 1.5x the number of subscribers they serviced 5 years ago.

Davidzon Radio

Davidzon Radio Inc. (“Davidzon”) engages in radio broadcasting activities through its ownership and operation of an AM radio station in the New York, New York market. Davidzon’s station is partially operated on a brokered time model whereby blocks of broadcast time are sold under fixed price, multi-year contracts to independent programmers.

PR Wireless

PR Wireless, Inc. (“PR Wireless”) operates under the OpenMobile brand name and is a mobile network operator that provides wireless telephony services throughout Puerto Rico.

Investment Manager and Administrator

GECM’s 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, who has been employed by MAST Capital Management, LLC (“MAST Capital”) since 2004. 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 over its 14 plus-year history under MAST Capital.

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 element of investment success. The members of GECM’s investment team believe that by concentrating intensive research efforts on a smaller selection of credits, they can obtain a significant competitive advantage and deliver outperformance over a credit cycle.

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

4


or in connection with a merger and 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 and customers;

 

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 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.

5


Valuation Procedures

We value our assets, an essential input in the determination of our net asset value, consistent with generally accepted accounting principles in the United States (“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 an Administration Agreement, dated as of September 27, 2016 (the “Administration Agreement”), by and between us and GECM, GECM provides the services of Michael J. Sell, our chief financial officer and treasurer, and Robert Wilson, our chief compliance officer.

Competition

We compete for investments with other BDCs and investment funds (including private equity funds, hedge funds, mutual funds, mezzanine funds and small business investment companies), as well as traditional financial services companies such as commercial banks, direct lending funds and other sources of funding. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles those entities have begun to invest in areas they have not traditionally invested in, including making investments in the types of portfolio companies we target. Many of these entities have greater financial and managerial resources than we do.

Exemptive Relief

We intend to apply to the SEC for exemptive relief that will allow us to co‑invest, together with other investment vehicles managed by GECM or MAST Capital, in specific investment opportunities. We are unable to predict whether or not the SEC will grant the requested exemption. If the SEC does not provide the requested exemption, GECM will allocate investment opportunities to different investment vehicles in accordance with its allocation policies.

Formation Transactions

On June 23, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Full Circle Capital Corporation, a Maryland corporation (“Full Circle”), that provided for a stock-for-stock merger (the “Merger”) of Full Circle with and into GECC. Concurrent with delivery of the Merger Agreement, we entered into a Subscription Agreement with Great Elm Capital Group, Inc., a Delaware corporation (“GEC”), and private investment funds (the “MAST Funds”) managed by MAST Capital (the “Subscription Agreement”). 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 a portfolio of debt instruments (the “Initial GECC Portfolio”) from the MAST Funds. As a result of the transactions contemplated by the Subscription Agreement, the MAST Funds owned approximately seventy five percent of the pre‑Merger outstanding shares of our common stock and GEC owned twenty five percent of the pre‑Merger outstanding shares of our 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 Investment Advisers Act of 1940, as amended (the “Advisers Act”). Subject to the overall supervision of our board of directors (our “Board”), GECM manages our day‑to‑day operations and provides investment advisory and management services to us. Under the terms of an Investment Management Agreement, dated as of September 27, 2016 (the “Investment Management Agreement”), by and between us and GECM, GECM:

 

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

6


 

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 and it has not previously provided investment advisory services to anyone else. 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 Fee

Under the Investment Management Agreement, GECM receives a fee from us, consisting of two components: (1) a base management fee and (2) an incentive fee.

The base management fee is calculated at an annual rate of 1.50% based on the average value of our total assets (determined under GAAP) (other than cash or cash equivalents but including assets purchased with borrowed funds or other forms of leverage) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.

The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre‑incentive fee net investment income for the quarter. Pre‑incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the administration agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre‑incentive fee net investment income includes any accretion of 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 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 our net investment income exceeds 2.1875% in any calendar quarter; and

7


 

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.

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

Quarterly Incentive Fee Based on Net Investment Income

Pre‑incentive fee net investment income

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

 

Percentage of pre‑incentive fee net investment income

allocated to income related portion of incentive fee

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

The second part of the incentive fee, 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 the investment adviser in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative Pre‑Incentive Fee Net Return (as defined below) during the most recent twelve full calendar quarter period ending on or prior to the date such payment is to be made (the “Trailing Twelve Quarters”) less (2) the aggregate incentive fees that were previously paid to the investment adviser during such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid). “Cumulative Pre‑Incentive Fee Net

8


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 d epreciation, if any, in each case calculated in accordance with GAAP, in respect of such Trailing Twelve Quarters.

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

 

 

 

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 the investment adviser 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).

9


The following hypothetical calculations illustrate the calculation of the capital gains based incentive 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%

(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.

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

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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);

 

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 shares 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 articles of incorporation 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);

11


 

direct costs and expe nses 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 o utside 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

 

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.

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.  We have accrued $0.08 million as of December 31, 2016 under the reimbursement provision of the Administration Agreement.  It is possible that such amount will be reduced as a result of GECM’s expense cap which will be determined retrospectively as of November 4, 2017.

Duration and Termination

Our Board approved the Investment Management Agreement on August 8, 2016. Unless terminated earlier, the Investment Management Agreement will continue in effect until September 27, 2018, and will renew for successive annual periods thereafter if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not “interested persons.” The Investment Management Agreement will automatically terminate if it is assigned. The Investment Management Agreement may be terminated by either party without penalty upon sixty days’ written notice to the other.

Conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation. Any material change to the Investment Management Agreement must be submitted to stockholders for approval under the Investment Company Act and we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the Investment Management Agreement.

Indemnification

We agreed to indemnify GECM, its stockholder 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 200 Clarendon Street, 51st Floor, Boston, MA 02116.

12


Regulation as a Business Development Company

We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the Investment Company Act. A majority of the outstanding voting securities of a company is defined under the Investment Company Act as the lesser of:

 

67% or more of the voting securities present at a meeting if more than 50% of the outstanding voting securities are present or represented by proxy, or

 

more than 50% of the outstanding voting securities.

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 200%. We may also be prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

We are generally unable to sell shares of our common stock at a price below net asset value per share. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage. We may, however, sell shares of our common stock at a price below net asset value per share:

 

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 shares of our common stock at a price below the then current net asset value of our common stock if our Board determines that such sale is in our and our stockholders’ best interests, and our stockholders approve our policy and practice of making such sales. In any such case, under such circumstances, the price at which shares of our common stock may be the fair value of such shares of common stock. We may be examined by the SEC for compliance with the Investment Company Act.

We may not acquire any asset 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;

 

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;

13


 

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 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 regulated investment company (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 200% 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 or emergency 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 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.

Material Federal Income Tax Matters

We intend to elect 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 Internal Revenue Code of 1986, as amended (the “Code”). To continue to qualify as a RIC, we must, among other things, (a) derive in each taxable year at least 90 percent of our gross income from dividends, interest (including tax‑exempt interest), payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including but not limited to gain from options, futures and forward contracts) derived with respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership” (a “QPTP”); and (b) diversify our holdings so that, at the end of each quarter of each taxable year (i) at least

14


50 percent of the market value of our total assets is represent ed by cash and cash items, U.S. Government securities, the securities of other regulated investment companies and other securities, with other securities limited, in respect of any one issuer, to an amount not greater than five percent of the value of our total assets and not more than 10 percent of the outstanding voting securities of such issuer (subject to the exception described below), and (ii) not more than 25 percent of the market value of our total assets is invested in the securities (other than U. S. Government securities and the securities of other regulated investment companies) (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 are subject to a nondeductible four percent U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:

 

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

 

certain undistributed amounts from previous years on which we paid no U.S. federal income tax.

While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the four percent federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. 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 otherwise 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

15


regular corporate rates without any deduction for distr ibutions 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, (v) 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.

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 payment-in-kind (“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 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.

16


If we invest in foreign securities, we may be subject to wi thholding and other foreign taxes with respect to those securities. Stockholders will generally not be entitled to claim a U.S. foreign tax credit or deduction with respect to foreign taxes paid by us.

If we acquire shares in a “passive foreign investment company” (a “PFIC”), we may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we can elect to mark‑to‑market at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Our ability to make either election will depend on factors beyond our control. Under either election, we may be required to recognize in a year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.

If we hold more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation (“CFC”), we may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to our pro rata share of the corporation’s income for the taxable year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. 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 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 receives 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 a QEF and subpart F income from CFCs will be “good income” for purposes of the 90% gross income requirement to the extent it 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 and subpart F income for which no distribution is received during the RIC’s taxable year would be “good income” for the 90% gross income requirement. The Internal Revenue Service (the “IRS”) has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and subpart F income 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 recently proposed regulations that would treat such income as not being “good income” for purposes of the 90% gross income requirement. If such regulations are finalized, and if we realize a material amount of such income and it is not considered “good income” for purposes of the 90% gross income requirement, we may fail to qualify as a RIC.

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.

17


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 suc h dispositions at times that, from an investment standpoint, are not advantageous.

Some of the income that we might otherwise earn, such as lease income, management fees, or income recognized in a work‑out or restructuring of a portfolio investment, may not satisfy the 90% gross income requirement. To manage the risk that such income might disqualify us as a RIC for a failure to satisfy the 90% gross income requirement, one or more of our subsidiaries treated as U.S. corporations for U.S. federal income tax purposes may be employed to earn such income. Such corporations will be required to pay U.S. corporate income tax on their earnings, which ultimately will reduce the yield to our stockholders on such income and fees.

Failure to Qualify as a RIC

If we were unable to qualify for treatment as a RIC, and relief is not available as discussed above, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders nor would we be required to make distributions for tax purposes. Distributions would generally be taxable to our stockholders as ordinary dividend income eligible for reduced maximum rates for non-corporate stockholders to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the 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 and their respective staffs). The Administration Agreement may be terminated by either party without penalty upon sixty days’ written notice to the other party.

We bear all costs and expenses that are incurred in our operation and transactions and not specifically assumed by GECM pursuant to the Investment Management Agreement.

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.

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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 be terminated by either party without penalty upon sixty-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.

Item 1A. Risk Factors

Risks Relating to Our Investments

We face increasing competition for investment opportunities.   We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and small business investment companies), as well as traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors have a lower cost of capital and access to funding sources that are not available to us, including from the Small Business Administration. In addition, 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. 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.

We may lose all of our investment in Avanti. You should be aware that 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 Avanti’s 10% senior secured bonds due 2019 (the “Existing Notes”).

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

On October 17, 2016, Avanti announced the completion of its consent solicitation process with respect to the Existing Notes, receiving consents from the holders of 89.5% of the Existing Notes to permit paying the interest due on October 1, 2016 with respect to consenting holders’ Existing Notes in the form of additional Existing Notes in lieu of cash.  

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Because Avanti failed to obtain consent from at least 90% of the holders of the Existing Notes, it was required to pay $3.39 million of the October coupon in the form o f 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 end of the offer period (in each case as defined under the City Code), as well as the launch of a consent solicitation, exchange offer and new money offer as part of a larger financial restructuring of the Existing Notes.

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

On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to permit, among other things, the incurrence of up to $132.5 million in super senior indebtedness and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes, (2) offer to holders of Existing Notes the opportunity to purchase up to $132.5 million aggregate principal amount of 10%/15% Senior Secured Notes due 2021 (the "PIK Toggle Notes") (the "New Money Offer") and (3) offer to holders participating in the New Money Offer to exchange a portion of their Existing Notes for additional PIK Toggle Notes.  Holders who elected to backstop the New Money Offer also received their pro rata share of additional common equity issued by Avanti in an aggregate amount equal to 9.09% of Avanti’s total outstanding shares.

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

If there is an event of default under the indentures governing the PIK Toggle Notes or the Existing Notes and the obligations under the PIK Toggle Notes and/or the Existing Notes are accelerated, Avanti likely will not have sufficient liquidity to pay the obligations under the PIK Toggle Notes or the Existing Notes, as the case may be. You should be aware that, 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/or the Existing Notes and the imposition of costs and other additional risks on holders of the PIK Toggle Notes and the Existing Notes, including a material reduction in the value of the PIK Toggle Notes and the Existing Notes and their potential conversion to equity interests in Avanti. In such an event, we may lose all or part of our investment in Avanti.

We committed to purchase an additional $5.6 million of Avanti debt in connection with the refinancing.

As of December 31, 2016, Avanti is our largest investment. 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.

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.

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In addition, Avanti’s business may also be affected by the significant competition in the wireless telecommunications in dustry. 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 prov iders 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 technologie s 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 re quired payments under its debt securities held by us, which could result in a material decrease in the fair value of such debt securities, and a corresponding material adverse change in our financial position and results of operations.

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

Our portfolio will be concentrated in a limited number of industries, which subjects us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.   Our portfolio is likely to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact our aggregate realized returns.

In addition, we may from time to time invest a relatively significant percentage of our portfolio in industries 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 on 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 purchase our shares, depending on expected future investment opportunities. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed by them. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.

We are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.   We generally do not hold controlling equity positions in our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments if we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.

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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 und er 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 incl ude 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.

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 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;

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they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them mo re 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;

 

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.

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 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

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unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger competitors. These factors could adversely affect our investment returns as compared to companies investing primarily in the securities of public companies.

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

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.   Even though we may have structured investments as secured investments, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securing such subordinated claim to the bankruptcy estate. The principles of equitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior investment is re‑characterized as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to a 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 it 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.   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 Inter Bank Borrowing Rate (“LIBOR”) across a range of maturities and currencies may have been under‑reporting or otherwise manipulating the inter‑bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter‑bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

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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 governments, 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 governments, 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.

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

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

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

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.

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Risks Relating to Our Business and Structure

Capital markets experience periods of disruption and instability. These market conditions have materially and adversely affected debt and equity capital markets in the United States and abroad, which had, and may in the future have, a negative impact on our business and operations.   The global capital markets are subject to disruption as evidenced by, among other things, a lack of liquidity in the debt capital markets, significant write‑offs in the financial services sector, the re‑pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. We cannot provide any assurance that these conditions will not significantly worsen. Equity capital may be difficult to raise because, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value.

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.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.   Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We are obligated to register the resale of all of the shares of our common stock issued to the MAST Funds and GEC in the Formation Transactions. The shares issued in the Formation Transaction represent approximately sixty two percent of our outstanding shares of common stock at December 31, 2016.

The MAST funds are not prohibited from transferring their shares of our common stock. Any sale by the MAST Funds of all or a portion of their shares could cause the market price of shares of our common stock to drop significantly, even if our business is doing well.

GEC and the MAST Funds collectively own the majority of our outstanding common stock and may attempt to exert control over us in a manner that is adverse to your interests.   GEC and the MAST Funds collectively own the majority of the outstanding shares of our common stock and accordingly may control the results of matters submitted to the vote of our stockholders. GEC and the MAST Funds agreed to vote their shares proportionately to our other stockholders on certain matters and until they collectively own less than thirty five percent of the outstanding shares of our common stock. Although there is no agreement between GEC and the MAST Funds to act in concert with respect to the shares of our common stock they own, funds managed by MAST (including some of the MAST Funds) are the largest stockholder of GEC and Peter A. Reed, a partner at MAST and our chief executive officer, is 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.

You may not receive distributions or our distributions may not grow over time.   We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year‑over‑year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See “Regulation as a Business Development Company.”

We may borrow money, which would magnify the potential for loss on amounts invested and may increase the risk of investing with us.   We assumed Full Circle’s outstanding 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.

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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 di stributions 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 table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.

 

Assumed Return on Our Portfolio (1) (2)

(net of expenses)

 

(10.0)%

 

(5.0)%

 

0.0%

 

5.0%

 

10.0%

Corresponding net return to common stockholder

 

(10.47)%

 

(6.00)%

 

(1.53)%

 

2.94%

 

7.41%

 

(1)

Assumes $154.7 million in total portfolio assets, $33.6 million in senior securities, $ 173.0 million in net assets, and an average cost of funds of 7.86%. 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 December 31, 2016 total portfolio assets of at least 1.71%

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. The ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including, but not limited to, its ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which GECM competes for experienced personnel, have greater resources than it has.

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 continue to borrow from financial institutions and 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.

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

In addition, with certain limited exceptions, we are only allowed to borrow or issue debt securities or preferred stock such that our asset coverage, as defined in the Investment Company Act, equals at least 200% 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 loans / notes 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 recharacterize 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 (EU) 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 and 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 EU negatively impacts consumer confidence, market conditions and credit factors, our business, financial condition and results of operations could be materially adversely affected.

In October 2014, the Federal Reserve announced that it was concluding its bond‑buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal 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

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crisis, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to acce ss 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 the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from a continued sell‑off of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued 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.

In November 2016, the U.S. held its Federal election and the Republican Party nominee was elected. The Republican Party now controls both the executive and legislative branches of government. Although it remains too early to accurately predict the forthcoming regulatory environment, a number of recent regulatory reforms, as well as proposals for future regulatory reform, may be blocked, repealed, modified or otherwise invalidated, including those that are in the process of being implemented. Potential reform initiatives or regulatory changes, including those arising out of or in connection with the presidential executive order dated February 3, 2017, that may directly or indirectly impact our business or operating activities include:

 

a repeal or replacement of portions of the Dodd–Frank Act, including the Volcker Rule;

 

changes to the regulatory landscape of public companies, financial institutions and trading, advisory and asset management firms;

 

alterations to the SEC’s enforcement authority; and

 

the changing leadership at key financial regulatory agencies, including the SEC, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, the Federal Reserve and the Financial Stability Oversight Council.

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;

 

your interest in GECC may be diluted by the issuance of additional shares of our common stock or preferred stock;

 

GEC and the MAST Funds 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 document;

 

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

 

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.

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Our failure to maintain our status as a BDC would reduce our operating flexibility.   We 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 ou r status as a BDC. If we decide to withdraw our BDC election, or if we otherwise fail to qualify, or to maintain our qualification, as a BDC, we may be subject to substantially greater regulation under the Investment Company Act as a closed ‑end management investment company. Compliance with such regulations would significantly decrease our operating flexibility and would significantly increase our costs of doing business.

Regulations governing our operations as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.   We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, referred to collectively as “senior securities,” up to the maximum amount permitted under the Investment Company Act. Under the provisions of the Investment Company Act applicable to BDCs, we are permitted to issue senior securities (e.g., notes and preferred stock) in amounts such that our asset coverage ratio, as defined in the Investment Company Act, equal at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.

If we issued preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights including, for example, the right to elect one or more of our directors, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest.

We are not generally able to issue and sell shares of our common stock at a price below net asset value per share. We may, however, sell shares of our common stock, or warrants, options or rights to acquire our common stock, at a price below the then‑current net asset value per share of our common stock if our Board determines that such sale is in our and our stockholders’ best interests. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board, equals or closely approximates the market value of such securities (less any distributing commission or discount calculated). Certain sales of our common stock below net asset value per share also require approval by our stockholders in accordance with the Investment Company Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then our existing common stockholders’ percentage ownership at that time will decrease, and they will experience dilution.

Our common stock price may be volatile and may decrease substantially, and you may lose money in connection with an investment in our shares.   The trading price of our common stock will likely fluctuate substantially. The price of our common stock may increase or decrease, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

 

price and volume fluctuations in the overall stock market from time to time;

 

investor demand for our shares;

 

significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;

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exclusion of our common st ock from certain indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of certain investment funds to own our common stock and put short ‑term selling pressure on our common stock;

 

changes in regulatory policies or tax guidelines with respect to RICs or BDCs;

 

failure to qualify as a RIC, or the loss of RIC status;

 

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

changes, or perceived changes, in the value of our portfolio investments;

 

departures of GECM’s key personnel;

 

operating performance of companies comparable to GECC; or

 

general economic conditions and trends and other external factors.

If the price of shares of our common stock decreases, you may lose money if you were to sell your shares of our common stock.

In addition, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of the price of our securities, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.   Our Board has the authority to modify or waive our investment objectives, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay our stockholders dividends or other distributions and cause you to lose all or part of your investment.

We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income.   For U.S. federal income tax purposes, we may be required to include in income certain amounts before our receipt of the cash attributable to such amounts, such as original issue discount (“OID”), which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. For example, such original issue discount 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 be subject to additional corporate‑level taxes.

We may choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive.   We may distribute a portion of our taxable distributions in the form of shares of our stock. Under applicable provisions of the Code, distributions payable in cash or in shares of stock at the election of stockholders may be treated as a taxable distribution. The IRS has issued private rulings indicating that this rule will apply even if the total amount of cash that may be distributed is limited to no more than 20% of the total distribution.

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Under these rulings, if too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions consist ent with these rulings that are payable in part in our stock, taxable stockholders receiving such distribution will be required to include the full amount of the distribution (whether received in cash, stock or a combination thereof) as ordinary income (or as a long ‑term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such distribution in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income wi th respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non ‑U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect to all o r a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock, in order to pay taxes owed on distribution, such sales may put downward pressure on the tradin g price of our common stock.

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 so 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 it to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non‑U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.

We will be subject to corporate‑level 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 status. 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 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 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 and the value of your GECC shares.

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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 refrai n 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 absen ce of such 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 ap propriate to do so. The use of leverage increases our likelihood of default, which would impair the value of your shares. In addition, GECM will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that porti on 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 capita l gains as compared to income producing securities. Such a practice could result in us investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

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.

A general increase in interest rates will likely have the effect of making it easier for GECM to earn 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 at or 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.

GECM has the right to resign on sixty-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 sixty 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 sixty days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption; our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected; and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective and current investment portfolio may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations and cause you to lose your investment.

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

33


company whose securities are registered under Exchange Act, as well as additional corporate governance requirements, including requirements under the Sar banes-Oxley Act of 2002 (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. 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.

Pending legislation may allow us to incur additional debt. Legislation introduced in the U.S. House of Representatives, if passed, would increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to 150%. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may increase.

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.

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 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.

34


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.

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

Provisions of the Maryland General Corporation Law and our organizational documents could deter takeover attempts and have an adverse impact on the prices of our common stock.   The Maryland General Corporation Law and our organizational documents contain provisions that may discourage, delay or make more difficult a change in control of GECC or the removal of our directors. We are subject to the Maryland Business Combination Act and the Investment Company Act. If our Board does not approve a business combination, the Maryland Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our Board could amend our bylaws to repeal our current exemption from the Control Share Acquisition Act. The Control Share Acquisition Act also may make it more difficult for a third party to obtain control of GECC and increase the difficulty of consummating such a transaction.

Our Board is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.   Under Maryland General Corporation Law and our organizational documents, our Board is authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, our Board will be required by Maryland law and our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, our Board could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve premium prices for holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by our common stockholders. Certain matters under the Investment Company Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote as a separate class from the holders of common stock on a proposal to cease operations as a BDC. In addition, the Investment Company Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share

35


of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.

GECM may not be able to achieve the same or similar returns as those achieved by MAST Capital.   MAST’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 no investment advisory experience, including no experience managing a regulated closed‑end management investment company that has elected to be regulated as a BDC. Therefore, GECM may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in our shares entails more risk than the shares of a comparable company with a substantial operating history.

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 and have no operating history and GECM has no prior experience managing a BDC.   We were formed on April 22, 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 no 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 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 earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of the Merger, (ii) in which we have total annual gross revenue of at least $1.0 billion, or (iii) 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 (b) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period. For so long as we remain an “emerging growth company” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act. We cannot predict if investors will find our securities less attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active and more volatile trading market for our securities.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised

36


accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounti ng 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, including MAST Capital. 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 and GECM’s chief investment officer, will continue to have significant responsibilities for funds managed by MAST Capital.

Although funds managed by MAST Capital or 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. Neither MAST Capital nor GECM is 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 (including MAST Capital) 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 sixty-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.

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.

37


Potential Changes in Law or Regulation.   In December 2015, the SEC proposed a new rule to regulate the use of derivatives by registered investment companies, including us. If the rule goes into effect, it could limit our ability to invest or remain invested in derivatives. In addition, other fu ture 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 imple mented 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.

Shares of closed-end investment companies, including business development companies, frequently trade at a discount from their net asset value. Shares of closed-end investment companies, including business development companies, frequently trade at a discount from their net asset value. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share of common stock may decline.

We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if our board of directors determines that such sale is in the best interests of GECC and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, equals the fair value of such securities (less any distributing commission or discount calculated). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then your percentage ownership at that time will decrease, and you may experience dilution.

You may not receive distributions or our distributions may not grow over time and a portion of our distributions may be a return of capital. We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution (i.e., not subject to any legal restrictions under Maryland law on the distribution thereof). We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this document. Due to the asset coverage test applicable to us under the Investment Company Act as a BDC, we may be limited in our ability to make distributions.

When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain

We currently intend to distribute realized net capital gains (i.e., net long term capital gains in excess of short term capital losses), if any, at least annually, we may in the future decide to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated as if you had received an actual distribution of the capital gains we retain and reinvested the net after tax proceeds in GECC. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you.

Our current intention is to make any distributions in additional shares of our common stock under our dividend reinvestment plan out of assets legally available therefor, unless you elect to receive your distributions and/or long-term capital gains distributions in cash. If you hold shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash.

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the Investment Company Act or if distributions are limited by the terms of any of our borrowings.

Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan . All distributions declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time. Stockholders who receive distributions in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would

38


depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stock holder.

Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock. The Investment Company Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain exceptions. Our shares might trade at premiums that are unsustainable or at discounts from net asset value.

Shares of business development companies like us may, during some periods, trade at prices higher than their net asset value per share and, during other periods, as frequently occurs with closed-end investment companies, trade at prices lower than their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events for venture capital backed companies, and the mix of companies in our investment portfolio over time. Negative or unforeseen developments affecting the perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative to our net asset value per share.

The possibility that our shares will trade at a discount from net asset value or at premiums that are unsustainable are risks separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a business development company that might trade at a discount or unsustainable premium is more pronounced for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in premium or discount levels than upon increases or decreases in net asset value per share.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock. In the future, we may attempt to increase our capital resources by making offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, subject to the restrictions of the Investment Company Act. Upon a liquidation of our company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the value of our common stock, or both. Any preferred stock we may issue would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us. In addition, proceeds from a sale of common stock will likely be used to increase our total assets or to pay down our borrowings, among other uses. This would increase our asset coverage ratio and permit us to incur additional leverage under rules pertaining to business development companies by increasing our borrowings or issuing senior securities such as preferred stock or additional debt securities.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our executive offices are located at 200 Clarendon Street, 51st Floor, Boston, MA 02116, and are provided by GECM under the Administration Agreement.

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Item 3.  Legal Procee dings

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.

Two complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation, et al. , filed on September 23, 2016 (the “Saunders Action”), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the “Russell Action”), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the “Circuit Court”), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the “Speiser Action,” and together with the Saunders Action and the Russell Action, the “Actions”).

On October 24, 2016, we, Full Circle, GEC, MAST Capital, certain directors of Full Circle and the plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and the Company agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.

Item 4.  Mine Safety Disclosures

Not applicable

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the NASDAQ Global Market (“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 and our net asset value per share for each fiscal quarter since our stock began trading in the public markets on November 7, 2016:

 

 

 

 

 

 

Price Range

 

 

 

Net Asset Value (1)

 

 

High

 

 

Low

 

Fiscal 2016

 

 

 

 

 

 

 

 

 

 

 

 

Fourth quarter (beginning November 7, 2016)

 

$

13.52

 

 

$

11.90

 

 

$

10.35

 

 

(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 shares at the end of each period.

The last reported sale price for our common stock on the Nasdaq on March 24, 2017 was $10.89 per share. As of March 15, 2017, there were approximately 30 holders of record of the common stock, one of which represents all of our stockholders for whom shares are held in “nominee” or “street name.”

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Distributions

We offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the Investment Company Act or if distributions are limited by the terms of any of our borrowings.

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. There were no dividends declared prior to the Merger. The table is divided by fiscal year according to record date.

 

Date Declared

 

Record Date

 

Payment Date

 

Per Share Amount

 

Fiscal 2016:

 

 

 

 

 

 

 

 

December 22, 2016

 

December 30, 2016

 

January 16, 2017

 

$

0.166

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

0.166

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

0.498

 

 

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 tax-free 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 distribution 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, 2016, our distributions were made from undistributed net investment income. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the Investment Company Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment.

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Issuer Purchases of Equity Securities

In the prospectus for the Merger, we announced that we would initiate a stock buyback program. For the quarter ended December 31, 2016, we purchased 98,172 shares under our stock buyback program at a weighted average price of $10.73 per share. As of March 24, 2017, we have cumulatively purchased 338,306 shares under our stock buyback program at a weighted average price of $11.18 per share, resulting in $3.8 million of cumulative cash paid, under the program since November 4, 2016.

 

Month

 

Total Number of Shares Purchased

 

 

Average Price Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Program

 

 

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

November 2016

 

 

16,030

 

 

$

10.79

 

 

 

16,030

 

 

$

14,826,985

 

December 2016

 

 

82,142

 

 

$

10.72

 

 

 

82,142

 

 

$

13,946,200

 

Total

 

 

98,172

 

 

$

10.73

 

 

 

98,172

 

 

 

 

 

 

Performance Graph

This graph compares the return on our common stock with that of the Standard & Poors’ 500 Index and the Nasdaq Financial 100 Index, for the period from November 3, 2016 the date of our merger, after which our common stock began trading on Nasdaq, through December 31, 2016. The graph assumes that, on November 3, 2016, a person invested $10,000 in each of the S&P 500 Index and the Nasdaq Financial 100 Index, and our common stock at the equivalent closing price of Full Circle’s last day of trading. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

 

 

 

The graph and other information furnished under this Item 5 shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.

42


Item 6. Selecte d Financial Data

The following selected financial data is derived from our consolidated financial statements for the period from April 22, 2016 (our inception) through December 31, 2016. The 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 report.

 

Dollar amounts in thousands, except per share data

 

Period from inception through

December 31, 2016

 

Statement of Operations Data:

 

 

 

 

Total Investment Income

 

$

5,831

 

Total Gross Expenses

 

 

5,906

 

Total Net Expenses

 

 

5,826

 

Net Investment Income

 

 

5

 

Net Decrease in Net Assets Resulting

   from Operations

 

 

(17,874

)

 

 

 

 

 

Per Share Data:(1)

 

 

 

 

Net Investment Income

 

 

0.00

 

Net Decrease in Net Assets Resulting

   from Operations

 

 

(1.39

)

Dividends Declared

 

0.166

 

 

 

 

 

 

Statement of Assets and Liabilities Data:

 

 

 

 

Total Assets

 

$

236,544

 

Total Net Assets

 

$

172,984

 

Other Data:

 

 

 

 

Total Return based on Market Value (2)

 

 

(2.03

)%

Total Return based on Net Asset Value (2)

 

 

(5.30

)%

 

(1)

Per share data is based on average weighted shares outstanding, except where such amounts need to be adjusted to be consistent with what is disclosed in the financial highlights of our consolidated financial statements.

(2)

Total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment plan, and is assumed to 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.

Item 7. Management’s Discussion and Anal ysis of Financial Condition and Results of Operations

Overview

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

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

43


Beginning with our tax year starting October 1, 2016, we intend to elect to be tr eated 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.

Formation Transactions

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

 

On June 23, 2016, GEC contributed $30.0 million 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 $90.0 million 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 a registration rights agreement with GEC and the MAST Funds.

Full Circle Merger

On June 23, 2016, we entered into 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 $74.7 million 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 $5.4 million 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 can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger and acquisition activity, pricing in the high yield credit markets, our expectations of future investment opportunities, the general economic environment as well as the competitive environment for the types of investments we make.

As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements. See “Regulation as a Business Development Company” and “Federal Income Tax Matters”.

44


Revenues

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

Expenses

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

Critical Accounting Policies

Valuation of Portfolio Investments

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

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

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

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 of directors;

45


 

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 o f 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 each of the audit committee and our Board.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral; the portfolio 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 strive to maximize 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, including assumptions about risk. 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.

Our investments may be categorized based on the types of inputs used in their valuation. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by GAAP into the three broad levels as follows:

Level 1

Investments valued using unadjusted quoted prices in active markets for identical assets.

Level 2

Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.

Level 3

Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.

Revenue Recognition

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

46


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

Portfolio and Investment Activity

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

 

 

 

Dollars in millions

 

 

 

 

 

Time Period

 

Acquisitions (1)

 

 

Dispositions (2)

 

 

Weighted   Average Interest Rate

End of Period (3)

 

Formation Transactions

 

$

90.5

 

 

$

 

 

N/A

 

Merger

 

 

74.7

 

 

 

 

 

N/A

 

November 4, 2016 through December 31, 2016

 

 

42.0

 

 

 

(41.7

)

 

 

10.00%

 

For the year ended December 31, 2016

 

$

207.2

 

 

$

(41.7

)

 

N/A

 

Since inception

 

$

207.2

 

 

$

(41.7

)

 

N/A

 

 

(1)

Includes new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings and payment in kind “PIK” income

(2)

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

(3)

Weighted average interest rate is based upon the stated coupon rate and par value of outstanding debt securities at the measurement date. Debt securities on non-accrual status are included in the calculation and are treated as having 0.00% as their applicable interest rate for purposes of this calculation, unless such debt securities are valued at zero.

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the period from inception through December 31, 2016:

 

Dollar amounts in thousands

 

For the period from

inception through

December 31, 2016

 

Beginning Investment Portfolio

 

$

 

Portfolio Investments Acquired via the Formation

   Transaction and Merger

 

 

165,152

 

Portfolio Investments Acquired (1)

 

 

42,006

 

Amortization and Accretion of Fixed Income

   Premiums and Discounts

 

 

2,438

 

Portfolio Investments Repaid

 

 

(41,738

)

Net Change in Unrealized Gain (Loss) on

   Investments

 

 

(13,455

)

Net Realized Gains (Losses) on Investments

 

274

 

Ending Investment Portfolio

 

$

154,677

 

 

(1)

Includes PIK income.

47


During the period from inception through December 31, 2016, we recorded net unrealized appreciation (depreciation) of $13.5 million.

During the period from inception through December 31, 2016, we recorded net realized gains of $0.3 million, primarily in connection with our disposition of our debt investments in US Shale Solutions, LLC.

Portfolio Classifications

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

 

 

 

31-Dec-16

 

 

 

 

Investments at Fair Value (dollars in millions)

 

 

Percentage of Total Portfolio

 

 

Investments:

 

 

 

 

 

 

 

 

 

Debt Instruments

 

$

154,176

 

 

 

99.7

%

 

Warrants

 

 

433

 

 

 

0.3

%

 

Limited Liability Company Interests

 

 

68

 

 

 

%

(1)

Total Investments at Fair Value

 

$

154,677

 

 

 

100.0

%

 

 

 

(1)

Rounds to less than 0.005%

 

The following table shows the fair value of our portfolio of investments by industry, as of December 31, 2016:

 

 

 

31-Dec-16

 

 

 

Investments at Fair Value (dollars in millions)

 

 

Percentage of Total Investment Portfolio

 

Wireless Telecommunications Services

 

$

52.3

 

 

 

33.8

%

Metals and Mining

 

 

13.9

 

 

 

9.0

%

Building Cleaning and Maintenance Services

 

 

12.5

 

 

 

8.1

%

Hardware

 

 

12.1

 

 

 

7.9

%

Radio Broadcasting

 

 

9.3

 

 

 

6.0

%

Wireless Communications

 

 

8.0

 

 

 

5.1

%

Real Estate Services

 

 

6.9

 

 

 

4.5

%

Consumer Discretionary

 

 

6.7

 

 

 

4.3

%

Real Estate Holding Company

 

 

6.0

 

 

 

3.9

%

Casinos and Gaming

 

 

5.8

 

 

 

3.7

%

Maritime Security Services

 

 

4.3

 

 

 

2.8

%

Information and Data Services

 

 

4.2

 

 

 

2.7

%

Consumer Financing

 

 

3.8

 

 

 

2.5

%

Hotel Operator

 

 

3.6

 

 

 

2.3

%

Grain Mill Products

 

 

2.8

 

 

 

1.8

%

Biological Products

 

 

1.7

 

 

 

1.1

%

Internet Advertising

 

 

0.8

 

 

 

0.5

%

Energy Efficiency Services

 

 

 

 

 

0.0

%

Total

 

$

154.7

 

 

 

100.0

%

 

48


Results of Operations

 

 

 

In Thousands

 

 

Per Share (1)

 

Total Investment Income

 

$

5,831

 

 

$

0.45

 

Interest Income (2)

 

 

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

 

Director’s 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 figures noted above are based on a weighted average of 12.9 million shares for the period ended December 31, 2016, except where such amounts need to be adjusted to be consistent with the financial highlights of our consolidated financial statements.

(2)

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

Total Investment Income

 

 

 

In Thousands

 

 

Per Share (1)

 

Total Investment Income

 

$

5,831

 

 

$

0.45

 

Interest Income (2)

 

 

5,313

 

 

 

0.41

 

Other Income

 

 

518

 

 

 

0.04

 

 

Total Investment Income for the period from inception through December 31, 2016 was $5.8 million, which included $5.3 million of interest income.  Interest income included net accretion of OID and market discount of $2.4 million and total investment income included PIK income of $0.5 million.  Of the accretion of OID and market discount, $1.4 million was associated with our investment in Optima Specialty Steel which matured in December 2016.

We also generated $0.5 million of fee income.  Fee income was largely comprised of amendment fees on our loans to RiceBran Technologies Inc and Pristine Environments, LLC.

49


Expenses

 

 

 

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

 

Director’s 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

)

 

Total expenses for the period from inception through December 31, 2016 were $5.8 million, which included $3.5 million of costs associated with the Formation Transactions and Merger, which are non-recurring.

Total advisory fees were $1.3 million, with $0.4 million of management fees and $0.9 million of incentive fees accrued during the period.  The incentive fees are currently expected to be deferred in accordance with our investment management agreement.

Total administration fees were $0.2 million, which includes direct costs deemed reimbursable under our administration agreement and fees paid for sub-administration services.  We have accrued $0.1 million 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 will be determined after completion of the year ending November 4, 2017.

Interest expense for the period was $0.4 million.

Net Investment Income

Net investment income for the period from inception through December 31, 2016 was $0.0 million, which included $3.5 million of costs associated with the Formation Transactions and Merger, which are non-recurring.

Realized Gain (Loss) on Investments

During the period from inception through December 31, 2016, we recorded net realized gains of $0.3 million, primarily in connection with our disposition of our debt investments in US Shale Solutions, LLC.

We also realized a loss of $4.7 million associated with the purchase accounting for the Merger.  We have accounted for the Merger as a business combination under ASC Topic 805 and Regulation S-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.

50


Change in Unrealized Gain (Loss) on Investments

Net change in unrealized appreciation (depreciation) on investments was $(13.5) million for the year ended December 31, 2016. The following table summarizes the significant changes in unrealized appreciation (depreciation) of the Company’s investment portfolio, for the period from November 4, 2016 through December 31, 2016 by portfolio company.

 

Dollar amounts in thousands

 

 

 

 

 

4-Nov-16

 

 

31-Dec-16

 

Portfolio Company

 

Change in Unrealized Appreciation (Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized Appreciation (Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized Appreciation (Depreciation)

 

Avanti Communications

   Group plc

 

$

(12,225

)

 

$

54,629

 

 

$

53,577

 

 

$

(1,052

)

 

$

55,298

 

 

$

42,021

 

 

$

(13,277

)

Optima Specialty Steel

 

 

(1,684

)

 

 

13,726

 

 

 

14,164

 

 

 

438

 

 

 

15,100

 

 

 

13,854

 

 

 

(1,246

)

Sonifi Solutions, Inc.

 

 

782

 

 

 

 

 

 

 

 

 

 

 

 

5,933

 

 

 

6,715

 

 

 

782

 

Everi Payments Inc

 

 

444

 

 

 

11,581

 

 

 

11,705

 

 

 

124

 

 

 

11,598

 

 

 

12,166

 

 

 

568

 

Trilogy International

   Partners LLC

 

 

250

 

 

 

10,005

 

 

 

10,000

 

 

 

(5

)

 

 

10,005

 

 

 

10,250

 

 

 

245

 

Other (1)

 

 

(527

)

 

 

75,211

 

 

 

75,211

 

 

 

 

 

 

70,198

 

 

 

69,671

 

 

 

(527

)

Totals

 

$

(12,960

)

 

$

165,152

 

 

$

164,657

 

 

$

(495

)

 

$

168,132

 

 

$

154,677

 

 

$

(13,455

)

 

(1)

Other represents all remaining investments.

Liquidity and Capital Resources

At December 31, 2016, we had approximately $66.8 million of cash and cash equivalents, none of which was restricted in nature.

At December 31, 2016, we had investments in debt securities of 21 companies, totaling approximately $154.2 million at fair value and equity investments in four companies, totaling approximately $0.5 million at fair value. The debt investment amount includes $0.5 million in accrued PIK income earned for the year ended December 31, 2016, and $0.5 million, cumulatively, which is included in carrying value of our investments.

For the year ended December 31, 2016, cash provided by operating activities, consisting primarily of net purchases of investments and the items described in “Results of Operations,” was approximately $9.1 million, reflecting the purchases and repayments of investments, net investment income resulting from operations, offset by non-cash income related to OID and PIK income, changes in working capital and accrued interest receivable. Net cash provided by purchases and sales of investments was approximately $0.3 million, reflecting principal repayments and sales of $42.0 million, offset by additional investments of $41.7 million. Such amounts included draws and repayments on revolving credit facilities.  Our Board set our distribution rate at $0.083 per share per month for the first quarter of 2017 and we intend to re-evaluate our dividend rate from time to time.

Stock Buyback Program

We have implemented a stock buyback program through May 2018 pursuant to Rule 10b5‑1 of the Exchange Act to repurchase our shares in an aggregate amount of up to $15.0 million at market prices at any time the shares trade below 90% of NAV, subject to our compliance with our liquidity, covenant, leverage and regulatory requirements.  Our Board has increased the overall size of the stock buyback program by a further $35.0 million.

Off-Balance Sheet Arrangements

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

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Notes Payable.

On November 3, 2016, we assumed approximately $33.6 million in aggregate principal amount of Full Circle’s 8.25% Notes due June 30, 2020 (the “Notes”).  The Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) 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 our subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears at a rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at our option. The Notes are listed on the NASDAQ Global Market under the trading symbol “FULLL” with a par value of $25.00 per share.

Recent Developments

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 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 $80.0 million of new cash funding, with an additional $50.0 million of funding available on a delayed draw basis, and will have the ability to defer up to $112.0 million of future interest payments through April 2018.  We took part in the refinancing, exchanging $22.9 million of Existing Notes for new PIK Toggle Notes and purchasing an additional $9.2 million of PIK Toggle Notes for $8.9 million.  We continue to hold $47.2 million of Existing Notes.

In January 2017, we purchased an aggregate of $8.0 million face value of Nana Development Corp senior secured bonds.  The bonds have a coupon of 9.50% and mature March 15, 2019.

In January and February 2017, we sold all of our holdings in Trilogy International Partners, LLC.  We recognized approximately $0.3 million of realized gain on the sales.

In February 2017, we sold our loan to JN Medical Corporation for total consideration, including payment for expenses due under the loan agreement of $3.0 million.  We recognized approximately $1.0 million of gain on the sale.

In February 2017, our loans to RiceBran Technologies Corporation were paid off at par plus accrued interest and fees.

In February 2017, certain assets of Pristine Environments were acquired by our newly-formed, wholly owned subsidiary PE Facility Solutions LLC.  The proceeds of the asset acquisition were used by Pristine Environments to repay all but $0.5 million of our outstanding credit facility.

In March 2017, the Company’s holdings in the 12.50% Senior Secured Notes of Optima Specialty Steel were refinanced at par plus accrued interest of approximately $15.3 million following bankruptcy court approval of Optima’s debtor-in-possession financing, resulting in the reversal of the unrealized loss of approximately $1.2 million at December 31, 2016. We received an approximately $12.7 million allocation of such debtor-in-possession facility.

Our board of directors declared the monthly distributions for the second quarter of 2017 at an annual rate of approximately 7.39% of 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 28, 2017

May 15, 2017

May

$0.083

May 31, 2017

June 15, 2017

June

$0.083

June 30, 2017

July 14, 2017

 

 

52


Item 7A.  Quantitative and Qualita tive Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. As of December 31, 2016, 8 debt investments in our portfolio bore interest at a fixed rate, and the remaining 16 debt investments were at variable rates, representing approximately $95.0 million and $59.2 million in principal debt, respectively. The variable rates are based upon LIBOR.

To illustrate the potential impact of a change in the underlying interest rate on our net investment income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%, and 3% decrease in the underlying Prime Rate or LIBOR, and no other change in our portfolio as of December 31, 2016. We have also assumed there are no outstanding floating rate borrowings by the Company. See the below table for the effect the rate changes would have on net investment income.

 

[LIBOR or Prime Rate Increase (Decrease)

 

 

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

 

 

3.00

%

 

$

1.6

 

 

2.00

%

 

$

1.0

 

 

1.00

%

 

$

0.5

 

 

-1.00

%

 

$

(0.1

)

 

-2.00

%

 

$

(0.1

)

 

-3.00

%

 

$

(0.1

)

 

Although we believe that this analysis is indicative of our existing interest rate sensitivity at December 31, 2016, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including borrowing under a credit facility, that could affect the net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

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

Item 8 .  Consolidated Financial Statements and Supplementary Data

The financial statements listed in the index to financial statements immediately following the signature page to this report are incorporated herein by reference.

The financial statements of Full Circle as of June 30, 2016 and June 30, 2015 and for each of the years ended June 30, 2016, 2015 and 2014 are incorporated by reference to Full Circle’s Form 10-K (File No. 814-00809) filed on September 28, 2016.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2016, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable

53


assurance of achieving the desired control objectives, and management necessarily wa s required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Report on Internal Control Over Financial Reporting

Our chief executive officer and chief financial officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report. Based on their evaluation, our chief executive officer and chief financial officer have concluded that these disclosure controls and procedures are effective.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting is 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.  Our internal control over financial reporting includes those policies and procedures that:

 

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Fund;

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Fund's transactions are being made only in accordance with authorizations of Management and;

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Fund'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.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, Management used the framework established in Internal Control — Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2016, our internal control over financial reporting was effective.

Management's report was not subject to attestation by the Partnership's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

Attestation Report of the Independent Registered Public Accounting Firm

Not applicable.

Changes in Internal Controls Over Financial Reporting

In the quarter ended December 31, 2016, we developed a system of internal control over financial reporting that includes all of our transactions being processed by a third party sub-administrator, our financial statements being prepared by that sub-administrator and reviews and other controls involving GECM and our officers.

Item 9B.  Other Information

Not applicable.

54


PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

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.

 

Name

 

Age

 

Position

 

Director

Since

 

Expiration

of Term

Interested Directors

 

 

 

 

 

 

 

 

Peter A. Reed

 

37

 

Chairman of the Board, President and Chief Executive Officer

 

2016

 

2019

John E. Stuart

 

51

 

Director

 

2016

 

2018

Independent Directors

 

 

 

 

 

 

 

 

Mark C. Biderman

 

71

 

Director

 

2016

 

2017

Mark Kuperschmid

 

54

 

Director

 

2017

 

2017

 

The address for each of our directors is c/o Great Elm Capital Corp., 200 Clarendon Street, 51st Floor, Boston, Massachusetts 02116.

Peter A. Reed is our President, Chief Executive Officer and Chairman of our Board. Mr. Reed has served as one of GEC’s directors since May 2015. Mr. Reed is a Portfolio Manager and partner at MAST Capital and Chief Investment Officer of GECM. Mr. Reed currently serves as a director of International Wire Group Holdings Inc., a wire products manufacturing company, the chairman of the board of Nebraska Book Holdings, Inc, a retailer in the college bookstore industry, and a director of Avanti Communications Group plc, a UK-based satellite services provider. 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 and was primarily responsible for overall investment strategies, portfolio management, growth and capital market initiatives until November 2017. 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. In addition, Mr. Stuart is a managing member of Full Circle Advisors and a managing member of Full Circle Service Company. Mr. Stuart co-founded Full Circle Funding, LP in 2005 and is a managing partner. Prior to founding Full Circle Funding, LP, from 2002 to 2004, Mr. Stuart was managing member of Excess Capital LLC which provided financial advisory services and structured and funded equity and debt investments. Prior thereto he was co-founder and president of Titan Outdoor Holdings, a New York-based outdoor advertising company, between 1999 and 2002, and was a director until its sale in 2005. Prior thereto, Mr. Stuart was a managing director in the Corporate Finance Department of Prudential Securities Incorporated between 1996 and 1999. Mr. Stuart began his career at Oppenheimer where he was a member of the Mergers and Acquisitions Group and Corporate Finance Department from 1988 to 1996.

Mark C. Biderman served as a member of the board of directors of Full Circle and as chairman of Full Circle’s audit committee. Mr. Biderman also served as the chairman of the Special Committee of Full Circle’s board that negotiated the Merger. Mr. Biderman currently serves as a member of the board of directors and audit committees of Apollo Commercial Real Estate Finance, Inc., a real estate investment trust. Mr. Biderman also serves as a director and as the chairman of the audit committee of Atlas Energy Group, LLC. Mr. Biderman served as a member of the board of directors and audit committee of Atlas Energy GP, LLC, the general partner of Atlas Energy, L.P., a midstream energy service provider, from February 2011 until February 2015. Mr. Biderman served as a member of the board of directors of Atlas Energy, Inc., an independent natural gas producer, from July 2009 through February 2011. Mr. Biderman served as vice chairman of National Financial Partners, Corp. (NFP), a financial services company focused on distributing

55


financial products, from September 2008 through December 2008. From November 1999 until September 2008, Mr. Biderman served as NFP’s executive vice president and chief financial officer. From May 1987 to Oct ober 1999, Mr. Biderman served as managing director and head of the Financial Institutions Group at CIBC World Markets, an investment banking firm, and its predecessor, Oppenheimer & Co., Inc. (Oppenheimer). Prior to investment banking, he was an equity re search analyst covering the commercial banking industry. Mr. Biderman was on the ‘‘Institutional Investor’’ All American Research Team from 1973 to 1985 and was First Team Bank Analyst in 1974 and 1976. Mr. Biderman chaired the Due Diligence Committee at C IBC and served on the Commitment and Credit Committees. Mr. Biderman serves on the Board of Governors and as treasurer of Hebrew Union College- Jewish Institute of Religion and on the Advisory Council of the Program in Judaic Studies of Princeton Universit y. Mr. Biderman is a Chartered Financial Analyst.

Mark Kuperschmid  has been a private investor/advisor during the past decade across a variety of industries, and he has served in operating roles or provided strategic consulting services with respect to several investments. He previously served as Co-Head of Technology Investment Banking for Banc of America Securities and ran Trammell Crow Company's Northern California commercial real estate operation. He began his career as a financial analyst with Morgan Stanley in New York.

Executive Officers

 

Name

 

Age

 

Position

Peter A. Reed

 

37

 

Chairman of the Board, Chief Executive Officer and President

Michael J. Sell

 

39

 

Chief Financial Officer and Treasurer

Robert Wilson

 

37

 

Chief Compliance Officer

 

The address for each executive officer is c/o GECC, 200 Clarendon Street, 51 st  Floor, Boston, Massachusetts 02116.

Michael J. Sell  is our Chief Financial Officer and Treasurer. Prior to joining GECC, Mr. Sell was Full Circle’s Chief Financial Officer, Treasurer and Secretary since September 2013. Mr. Sell initially joined Full Circle Funding, LP, an affiliate of Full Circle Advisors, as a vice president in June 2008. From August 2010 through September 2012, Mr. Sell was employed by Full Circle’s sub-administrator, Conifer Financial Services, LLC, where he focused on BDC accounting and financial reporting. In September 2012, Mr. Sell rejoined Full Circle Service Company and was appointed as Full Circle’s assistant secretary in December 2012. Prior to joining Full Circle Funding, LP, from January 2007 to May 2008, Mr. Sell was employed by Sky Bell Asset Management, LLC (Sky Bell) as its chief investment officer. From April 2006 through December 2006, Mr. Sell was an independent consultant, providing services to Full Circle Funding, LP as well as to other clients, including Agile Group, LLC (Agile) and Sky Bell. From May 2004 through April 2006, Mr. Sell was employed by Agile in various roles, where he was actively involved in operational and portfolio analysis for its hedge fund of funds. Mr. Sell began his career in September 2001 at PricewaterhouseCoopers, LLP as a senior assurance associate focused on the financial services industry, until departing in April 2004.

Robert Wilson  is our Chief Compliance Officer. Mr. Wilson is also MAST’s Chief Financial Officer and Chief Compliance Officer. Mr. Wilson oversees MAST’s management company finance, tax accounting functions and manages MAST’s compliance program. He is also a member of MAST’s Risk Committee, the Best Execution Committee and the Valuation Committee. Prior to joining MAST in 2014, Mr. Wilson was a vice president—fund accounting manager at JP Morgan’s Hedge Fund Services. Previously, he was a Controller at Ignis Asset Management and BlueCrest Capital Management in London. Mr. Wilson started his career as a Controller at Lehman Brothers. Mr. Wilson is a Chartered Global Management Accountant, a global CPA/CIMA designation.

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 is posted on our website. We intend to disclose any amendments to or waivers of required provisions of our code of ethics by filing reports on Form 8-K.

56


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’s Rule 5605(a)(2), which provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the BDC, as defined in Section 2(a)(19) of the Investment Company Act.

Our Board determined that each of the directors is independent and has no relationship with us, except as a director and stockholder, with the exception of Messrs. Reed and Stuart.

Additional Information About Our Board and Its Leadership Structure

Our Board monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to us. Among other things, our Board considers the appointment of our investment manager, administrator and officers, and reviews and monitors the services and activities performed by our investment manager, administrator and officers and approves the engagement, and reviews the performance of, our independent public accounting firm.

Our Board may designate a chairman to preside over the meetings of the board of directors and meetings of the stockholders and to perform such other duties as may be assigned to her or him by the board. We do not have a fixed policy as to whether the chairman of the Board should be an independent director. We maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on the criteria that are in the best interests of GECC and our stockholders at such times.

The members of our Board believe that each 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 of directors. Our Board believes that Mr. Reed’s history with MAST, 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.

Our Board does not currently have a designated lead independent director. Our Board is aware of the potential conflicts that may arise when a non‑independent director is chairman of the board, but believes these potential conflicts are offset by its strong corporate governance policies. 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 of directors and are comprised solely of independent directors, (2) active monitoring of its chief compliance officer and (3) our compliance policies and procedures.

57


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 assis t the board of directors 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 will meet 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 200% immediately after each time we incur indebtedness, we generally have to invest at least 70% of our gross assets in “qualifying assets” and are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.

Committees of the Board of Directors

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. Biderman and Kuperschmid; each of whom is 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. Kuperschmid serves as chairman of our audit committee. Our Board has determined that Mr.Biderman 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. Biderman and Kuperschmid meets the current independence and experience requirements of Rule 10A‑3 under the Exchange Act.

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. Biderman and Kuperschmid; each of whom is considered independent under Nasdaq’s rules t 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. The nominating and corporate governance committee will consider nominees recommended by our stockholders.

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

58


annually reviewing and recommending for approval to our Board our investment 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. Biderman and Kuperschmid; each of whom is con sidered 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. Kuperschmid serves as chairman of the Compensation Committee.

Item 11.  Executive Compensation

Compensation Table

No compensation is paid by us to directors who are “interested persons.” Our independent directors each receive an annual fee of $25,000. 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 our audit committee receives an annual fee of $15,000 and each chairman of any other committee receives an annual fee of $10,000 for his or her additional services in these capacities. In addition, we purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors also have the option to receive their directors’ fees paid in shares of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment.

Compensation of Executive Officers

We do not provide direct compensation to our officers. Mr. Reed is indirectly entitled to a portion of any investment advisory fees paid by us to GECM under the Investment Management Agreement through his financial interests in affiliates of GECM. Mr. Sell, who serves as our chief financial officer and treasurer, and Mr. Wilson, our chief compliance officer, are paid by GECM, subject to reimbursement by us of our allocable portion of such compensation under the Administration 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.

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 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, 48 years old, is a Portfolio Manager of GECC and a Member of GECM’s Investment Committee. Mr. Ehlinger is also Head of Research at MAST Capital. Prior to rejoining MAST, Mr. Ehlinger was the COO & CFO of Wellsense Technologies, a medical device start-up. Before joining Wellsense, Mr. Ehlinger was a Partner at MAST 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

59


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.

Adam W. Yates, 34 years old, is a Portfolio Manager of GECC and a Member of GECM’s Investment Committee. Mr. Yates is also a Partner and the Head Trader at MAST. Mr. Yates manages MAST Capital’s trading responsibilities and, as a member of the Investment Committee, works closely with the senior investment team in security selection and portfolio construction. Mr. Yates is 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.

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 2016, 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.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

As of the date of this report, GEC is deemed to control (as such term is defined in the Investment Company Act) us.

The following table lists, as of March 15, 2017, the beneficial ownership of each of our directors, executive officers, each person known to us to beneficially own five percent or more of the outstanding shares of our common stock, and our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own five percent or more of our shares of common stock is based upon Schedule 13G and Schedule 13D filings by such persons with the SEC and other information obtained from such persons, if available. Unless otherwise indicated, we believe that each beneficial owner set forth in the table has sole voting and investment power and has the same address as request for proxy voting information to: Great Elm Capital Management, Inc., 200 Clarendon Street, 51st Floor, Boston, MA 02116.

 

Beneficial Owner

 

Shares

Beneficially

Owned (1)

 

 

Percent of

Class (2)

 

Interested Directors

 

 

 

 

 

 

 

Peter A. Reed

 

 

10,172

 

 

 

*

John E. Stuart

 

 

16,545

 

 

 

*

Independent Directors

 

 

 

 

 

 

 

Mark C. Biderman

 

 

5,037

 

 

 

*

Mark Kuperschmid

 

 

 

 

 

*

Executive Officers

 

 

 

 

 

 

 

Michael J. Sell

 

 

612

 

 

 

*

Robert Wilson

 

 

 

 

 

*

 

 

 

 

 

 

 

 

Directors and executive officers as a group

 

 

32,366

 

 

 

*

5% Beneficial Owners

 

 

 

 

 

 

 

Great Elm Capital Group, Inc.

 

 

1,966,667

 

 

15.66%

 

Entities affiliated with MAST Capital Management, LLC (3)

 

 

5,935,800

 

 

47.25%

 

 

*

Represents less than one percent

(1)

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act.

60


(2)

Based on a total of 12.6 million shares of our common stock issued and outstanding on March 15, 2017.

(3)

Represents shares held by the following shares for which MAST Capital has sole power to dispose:

 

Mast Credit Opportunities I Master Fund Limited, for which MAST Capital is the investment manager, holds 2,656,484 shares of Common Stock of the Issuer. 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 controlled the disposition and voting of the securities. MAST Capital has the right to an asset-based fee relating the above fund.

 

Mast Select Opportunities Master Fund LP, for which MAST Capital is the investment manager, holds 3,104,561 shares of Common Stock of the Issuer. 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 controlled the disposition and voting of the securities. MAST Capital has the right to an asset-based fee relating the above fund.

 

Mast Admiral Master Fund LP, for which MAST Capital is the investment manager, holds 174,755 shares of Common Stock of the Issuer. 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 controlled the disposition and voting of the securities. MAST Capital has the right to an asset-based fee relating the above fund.    

Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of March 15, 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

 

Over $100,000

John E. Stuart

 

Over $100,000

Independent Directors

 

 

Mark C. Biderman

 

$50,001 – $100,000

Mark Kuperschmid

 

None

 

(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 $11.02 on March 15, 2017 on the NASDAQ Global Market. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) under the Exchange Act.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

We are a party to the Investment Management Agreement and the Administration Agreement with GECM, which is wholly‑owned by GEC. GECM hired all of the employees of MAST Capital, a number of whom continue to be employees of MAST Capital. Affiliates of GECM entered into agreements with MAST and the initial employees of GECM under which MAST 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 nineteen percent of GEC. Mr. Reed serves as a member of the board of directors of GEC, in addition to being our chief executive officer and chief investment officer of GECM. Mr. Reed and a number of GECM’s initial employees also remain employees of MAST Capital which manages private investment funds, with investment objectives similar to ours.

Funds managed by MAST Capital own approximately eleven percent of the outstanding shares of Avanti and approximately six percent of the outstanding shares of Everi. 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

61


managed by advisers affiliated with GECM, including MAST Capital 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 report.

As of December 31, 2016, we and certain MAST Funds held debt securities issued by Avanti, Optima, Everi, Trilogy International Partners, LLC (“Trilogy”) and Sonifi Solutions, Inc.  The Avanti, Optima, Everi and Trilogy securities held by us were contributed to us by the MAST Funds per the Subscription Agreement.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16(a) of the Exchange Act, our directors and executive officers, and any persons holding more than 10% of our common stock, are required to report their beneficial ownership and any changes therein to the SEC and to us. Specific due dates for those reports have been established, and we are required to report herein any failure to file such reports by those due dates. Based solely on a review of copies of such reports and written representations delivered to us by such persons, we believe that during the fiscal year ended December 31, 2016, all Section 16(a) filing requirements applicable to the executive officers, directors and stockholders were timely satisfied except that Messrs. Stuart and Biderman, directors, and Mr. Sell, our chief financial officer and treasurer, did not timely file a Form 3 upon their appointment to such roles on November 3, 2016, but such Form 3’s were subsequently filed on December 9, 2016.

Item 14. Principal Accountant Fees and Services

The following table presents fees for professional services rendered by Deloitte and Touche LLP for fiscal year ended December 31, 2016.

 

 

 

Year Ended

December 31,

2016

 

Audit fees

 

$

302,500

 

Audit related fees

 

 

 

Tax fees

 

 

 

All other fees

 

 

 

Total fees

 

$

302,500

 

 

Audit Fees

Audit fees consist of fees billed for professional services rendered for the audits of our financial statements and services that are normally provided by Deloitte and Touche LLP in connection with statutory and regulatory filings.

Audit-Related Fees

Audit-related services consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.

Tax Fees

Tax fees consist of fees billed for professional services for tax compliance. These services include assistance regarding federal, state and local tax compliance.

62


All Other Fees

All other fees would include fees for products and services other than the services reported above.

Pre-Approval Policy

Our audit committee has established a pre-approval policy that describes the permitted audit, audit-related, tax and other services to be provided by the Company’s independent registered public accounting firm. The policy requires that our audit committee pre-approve the audit and non-audit services performed by the independent auditor in order to assure that the provision of such service does not impair the auditor’s independence.

Any requests for audit, audit-related, tax and other services that have not received general pre-approval must be submitted to our audit committee for specific pre-approval, irrespective of the amount, and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings of our audit committee. However, our audit committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to our audit committee at its next scheduled meeting. Our audit committee has not delegated its responsibilities to pre-approve services performed by the independent registered public accounting firm to management as of the date of this report.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

Financial Statements

The financial statements set forth on the index to financial statements immediately following the signature page to this report are incorporated by reference as if set forth herein.

The financial statements of Full Circle as of June 30, 2016 and June 30, 2015 and for each of the years ended June 30, 2016, 2015 and 2014 are incorporated by reference to Full Circle’s Form 10-K (File No. 814-00809) filed on September 28, 2016.

Exhibits

The exhibit index following the financial statements is incorporated herein by reference.

Financial Statement Schedules

No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements.

 

Item 16.  Form 10-K Summary

 

Not applicable.

63


SIGNA TURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on our behalf, thereunto duly authorized as of March 29, 2017.

 

 

GREAT ELM CAPITAL CORP.

 

 

 

 

By:

/s/ Peter A. Reed

 

Name:

Peter A. Reed

 

Title:

Chief Executive Officer

 

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on our behalf and in the capacity as of March 29, 2017.

 

Name

 

Capacity

 

 

 

/s/ Peter A. Reed

 

Principal Executive Officer and Director

Peter A. Reed

 

 

 

 

 

/s/ Michael J. Sell

 

Principal Financial Officer and Principal Accounting Officer

Michael J. Sell

 

 

 

 

 

/s/ Mark C. Biderman

 

Director

Mark C. Biderman

 

 

 

 

 

/s/ Mark Kuperschmid

 

Director

Mark Kuperschmid

 

 

 

 

 

/s/ John E. Stuart

 

Director

John E. Stuart

 

 

 

 

 

64


 

GREAT ELM CAPITAL CORP.

INDEX TO FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

Report of Independent Registered Public Accounting Firm

 

F-2

Consolidated Statement of Assets and Liabilities as of December 31, 2016

 

F-3

Consolidated Statement of Operations for the period from inception (April 22, 2016) through December 31, 2016

 

F-4

Consolidated Statement of Changes in Net Assets for the period from inception (April 22, 2016) through December 31, 2016

 

F-5

Consolidated Statement of Cash Flows for the period from inception (April 22, 2016) through December 31, 2016

 

F-6

Consolidated Schedule of Investments as of December 31, 2016

 

F-7

Notes to Consolidated Financial Statements

 

F-11

 

 

 

F-1


 

Report of Independent Regist ered Public Accounting Firm

To the Board of Directors and Stockholders of

Great Elm Capital Corp.

Boston, Massachusetts

We have audited the accompanying consolidated statement of assets and liabilities of Great Elm Capital Corp. and subsidiaries (the “Company”), including the schedules of investments, as of December 31, 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 April 22, 2016 (commencement of operations) to December 31, 2016. These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial highlights 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 the financial statements and financial highlights are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. 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 as of December 31, 2016, by correspondence with the custodian, borrowers and brokers; when replies were not received, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements and financial highlights present fairly, in all material respects, the financial position of Great Elm Capital Corp. and subsidiaries as of December 31, 2016, and the results of their operations, consolidated changes in its net assets, cash flows, and financial highlights for the period from April 22, 2016 (commencement of operations) to December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

 

McLean, Virginia

March 29, 2017

 

F-2


GRE AT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 2016

Dollar amounts in thousands (except per share amounts)

 

Assets

 

 

 

 

Investments, at fair value (amortized cost of $168,132)

 

$

154,677

 

Cash and cash equivalents

 

 

66,782

 

Receivable for investments sold

 

 

9,406

 

Interest receivable

 

 

4,338

 

Principal receivable

 

 

786

 

Due from portfolio company

 

 

312

 

Deposit at broker

 

 

56

 

Due from affiliates

 

 

80

 

Prepaid expenses and other assets

 

 

107

 

Total assets

 

$

236,544

 

 

 

 

 

 

Liabilities

 

 

 

 

Notes payable 8.25% due June 30, 2020 (including unamortized premium of $888)

 

$

34,534

 

Payable for investments purchased

 

 

21,817

 

Distributions payable

 

 

2,123

 

Due to affiliates

 

 

3,423

 

Accrued expenses and other liabilities

 

 

1,663

 

Total liabilities

 

$

63,560

 

 

 

 

 

 

Commitments and contingencies (Note 6)

 

$

 

 

 

 

 

 

Net Assets

 

 

 

 

Common stock, par value $0.01 per share (100,000,000 shares authorized, 12,790,880 shares

   issued and outstanding at December 31, 2016 )

 

$

128

 

Additional paid-in capital

 

 

219,317

 

Accumulated net realized losses

 

 

(34,341

)

Undistributed net investment income

 

 

1,335

 

Net unrealized depreciation on investments

 

 

(13,455

)

Total net assets

 

$

172,984

 

Total liabilities and net assets

 

$

236,544

 

Net asset value per share

 

$

13.52

 

 

The accompanying notes are an integral part of these financial statements.

F-3


GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF OPERATIONS

APRIL 22, 2016 (INCEPTION) TO DECEMBER 31, 2016

Dollar amounts in thousands (except per share amounts)

 

Investment Income:

 

 

 

 

 

Interest income

 

$

5,313

 

 

Other income

 

 

518

 

 

Total investment income

 

 

5,831

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Management fees

 

 

392

 

 

Incentive fees

 

 

863

 

 

Administration fees

 

 

224

 

 

Custody fees

 

 

10

 

 

Directors’ fees

 

 

38

 

 

Professional services

 

 

186

 

 

Professional services related to the Merger and Formation transactions

 

 

3,471

 

 

Interest and credit facility expenses

 

 

420

 

 

Other expenses

 

 

214

 

 

Total expenses

 

 

5,818

 

 

Accrued administration fees waiver

 

 

(80

)

 

Net expenses

 

 

5,738

 

 

Net investment income before taxes

 

 

93

 

 

Income tax, including excise tax

 

 

88

 

 

Net investment income

 

 

5

 

 

 

 

 

 

 

 

Net realized and unrealized gains (losses) on investment transactions:

 

 

 

 

 

Net realized gain/(loss) from:

 

 

 

 

 

Investments

 

 

274

 

 

Purchase Accounting

 

 

(4,698

)

 

Net change in unrealized appreciation (depreciation) from:

 

 

 

 

 

Investments

 

 

(13,455

)

 

Net realized and unrealized losses

 

 

(17,879

)

 

Net decrease in net assets resulting from operations

 

$

(17,874

)

 

 

 

 

 

 

 

Net investment income per share (basic and diluted):

 

$

0.00

 

(1)

Earnings per share (basic and diluted):

 

$

(1.39

)

 

Weighted average shares outstanding:

 

 

12,852,758

 

 

 

 

(1)

Rounds to less than 0.005

 

The accompanying notes are an integral part of these financial statements.

F-4


GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

APRIL 22, 2016 (INCEPTION) TO DECEMBER 31, 2016

Dollar amounts in thousands

 

Increase (decrease) in net assets resulting from operations:

 

 

 

 

Net investment income

 

$

5

 

Net realized gain on investments

 

 

274

 

Purchase accounting loss

 

 

(4,698

)

Net change in unrealized depreciation on investments

 

 

(13,455

)

Net decrease in net assets resulting from operations

 

 

(17,874

)

 

 

 

 

 

Distributions to stockholders from:

 

 

 

 

Net investment income

 

 

(2,123

)

Total distributions to stockholders

 

 

(2,123

)

 

 

 

 

 

Capital transactions:

 

 

 

 

Cash contribution

 

 

30,000

 

Acquired assets in the formation transaction

 

 

90,494

 

Acquired assets in the merger

 

 

73,541

 

Repurchase of common stock

 

 

(1,054

)

Net increase in net assets resulting from capital transactions

 

 

192,981

 

Total increase in net assets

 

 

172,984

 

Net assets at end of period

 

$

172,984

 

Undistributed net investment income

 

$

1,335

 

 

 

 

 

 

Capital share activity

 

 

 

 

Shares issued – cash contributions

 

 

1,966,667

 

Shares issued – formation transaction

 

 

5,935,800

 

Shares issued – merger

 

 

4,986,585

 

Shares repurchased

 

 

(98,172

)

Shares outstanding at the end of the period

 

 

12,790,880

 

 

The accompanying notes are an integral part of these financial statements.

F-5


GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

DECEMBER 31, 2016

Dollar amounts in thousands

 

Cash flows from operating activities

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

(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

 

 

(42,516

)

Payment-in-kind income

 

 

510

 

Proceeds from sales of investments

 

 

10,640

 

Proceeds from principal payments

 

 

31,098

 

Net realized (gain) loss on investments

 

 

(274

)

Purchase accounting loss

 

 

4,698

 

Net change in unrealized (appreciation) depreciation on investments

 

 

13,455

 

Amortization of premium and accretion of discount, net

 

 

(2,438

)

Amortization of premium on long term debt

 

 

(40

)

Increase (decrease) in operating assets and liabilities:

 

 

 

 

(Increase) decrease in receivable for investments sold

 

 

(9,406

)

(Increase) decrease in principal receivable

 

 

434

 

(Increase) decrease in interest receivable

 

 

(1,342

)

(Increase) decrease in deposit at broker

 

 

(56

)

(Increase) decrease in due from portfolio company

 

 

(224

)

(Increase) decrease in due from affiliates

 

 

(80

)

(Increase) decrease in prepaid expenses and other assets

 

 

174

 

Increase (decrease) in payable for investments purchased

 

 

21,817

 

Increase (decrease) in sub-administration fees payable

 

 

77

 

Increase (decrease) in due to affiliates

 

 

890

 

Increase (decrease) in accrued expenses and other liabilities

 

 

(816

)

Net cash provided by (used for) operating activities

 

 

8,727

 

Cash flows from financing activities

 

 

 

 

Cash contributions

 

 

59,109

 

Repurchase of common stock

 

 

(1,054

)

Net cash provided by (used for) financing activities

 

 

58,055

 

Net increase (decrease) in cash

 

 

66,782

 

Cash, beginning of period

 

 

 

Cash, end of period

 

$

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

 

$

2,123

 

Supplemental disclosure of cash flow information:

 

 

 

 

Cash paid for interest

 

$

460

 

 

The accompanying notes are an integral part of these financial statements.

 

 

F-6


GREAT ELM CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

Dollar amounts in thousands

 

Portfolio Company

 

Industry

 

Interest

 

 

Maturity

 

Par Amount/Quantity

 

 

Cost

 

 

Fair Value

 

 

% of NAV

 

Investments at Fair Value - 89.42% (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Debt  - 89.13% (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1st Lien/Senior Secured Debt  - 82.10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

310E53RD, LLC (3) (4)

 

Real Estate Holding Company

 

10.77% (L + 10.00, 10.15%  Floor,

16.00% Cap)

 

 

07/01/2017

 

$

6,000

 

 

 

5,982

 

 

$

5,982

 

 

 

3.46

%

Ads Direct Media, Inc. (3) (4) (5)

 

Internet Advertising

 

16.50% (L + 13.00%, 16.50% Floor)

 

 

05/02/2018

 

 

2,035

 

 

 

745

 

 

 

830

 

 

 

0.48

%

Avanti Communications Group

   PLC (6) (7) (8) (9)

 

Wireless Telecommunications Services

 

 

10.00%

 

 

10/01/2019

 

 

70,035

 

 

 

55,298

 

 

 

42,021

 

 

 

24.29

%

Chester Downs & Marina LLC / Chester

   Downs Finance Corp. (6)

 

Casinos and Gaming

 

 

9.25%

 

 

02/01/2020

 

 

6,000

 

 

 

5,801

 

 

 

5,760

 

 

 

3.33

%

Davidzon Radio, Inc. (3) (4)

 

Radio Broadcasting

 

11.00% (L + 10.00%, 11.00% Floor)

 

 

03/31/2020

 

 

10,127

 

 

 

9,358

 

 

 

9,297

 

 

 

5.37

%

JN Medical Corporation (3) (4) (5) (10)

 

Biological Products

 

16.77% (L + 16.00%, 11.25% Floor,

17.00% Cap)

 

 

06/30/2016

 

 

3,500

 

 

 

1,750

 

 

 

1,656

 

 

 

0.96

%

Luling Lodging, LLC (3) (4) (5)

 

Hotel Operator

 

17.77% (L + 17.00%, 12.25% Floor)

 

 

12/18/2017

 

 

4,500

 

 

 

3,578

 

 

 

3,578

 

 

 

2.07

%

OPS Acquisitions Limited and Ocean

   Protection Services Limited (3) (4) (7) (13)

 

Maritime Security Services

 

12.77% (L + 12.00%, 12.50% Floor)

 

 

06/01/2018

 

 

4,371

 

 

 

4,255

 

 

 

4,286

 

 

 

2.48

%

Optima Specialty Steel, Inc. (3) (6) (14)

 

Metals and Mining

 

 

12.50%

 

 

12/15/2016

 

 

15,100

 

 

 

15,100

 

 

 

13,854

 

 

 

8.01

%

PEAKS Trust 2009-1 (3) (4) (7)

 

Consumer Financing

 

7.50% (L + 5.00%, 7.50% Floor)

 

 

01/27/2020

 

 

1,862

 

 

 

1,092

 

 

 

1,072

 

 

 

0.62

%

PR Wireless, Inc. (3) (14)

 

Wireless Communications

 

10.00% (L + 9.00%, 10.00% Floor)

 

 

06/27/2020

 

 

8,288

 

 

 

7,524

 

 

 

7,645

 

 

 

4.42

%

Pristine Environments, Inc., Revolver (3) (4) (11)

 

Building Cleaning and Maintenance Services

 

15.27% (L + 14.50%, 11.70% Floor)

 

 

03/31/2017

 

 

8,129

 

 

 

8,129

 

 

 

8,129

 

 

 

4.70

%

Pristine Environments, Inc., Term

   Loan A (3) (4) (11)

 

Building Cleaning and Maintenance Services

 

16.27% (L + 15.50%, 12.70% Floor)

 

 

03/31/2017

 

 

1,630

 

 

 

1,630

 

 

 

1,630

 

 

 

0.94

%

Pristine Environments, Inc., Term

   Loan B (3) (4) (11)

 

Building Cleaning and Maintenance Services

 

16.27% (L + 15.50%, 12.70% Floor)

 

 

03/31/2017

 

 

3,004

 

 

 

3,004

 

 

 

2,807

 

 

 

1.62

%

RiceBran Technologies Corporation (3) (4)

 

Grain Mill Products

 

11.52% (L + 10.75%, 11.50% Floor,

12.00% cap)

 

 

06/01/2018

 

 

1,384

 

 

 

1,384

 

 

 

1,362

 

 

 

0.79

%

RiceBran Technologies Corporation (3) (4)

 

Grain Mill Products

 

11.52% (L + 10.75%, 11.50% Floor,

12.00% cap)

 

 

06/01/2018

 

 

1,375

 

 

 

1,362

 

 

 

1,366

 

 

 

0.79

%

Sonifi Solutions, Inc. (3) (8)

 

Consumer Discretionary

 

 

8.00%

 

 

03/28/2018

 

 

11,577

 

 

 

5,933

 

 

 

6,715

 

 

 

3.88

%

Tallage Adams, LLC (3) (15)

 

Real Estate Services

 

11.00% (L + 10.00%, 11.00% Floor)

 

 

12/31/2017

 

 

1,505

 

 

 

1,507

 

 

 

1,504

 

 

 

0.87

%

Tallage Lincoln, LLC. (3) (15)

 

Real Estate Services

 

11.00% (L + 10.00%, 11.00% Floor)

 

 

12/31/2019

 

 

5,423

 

 

 

5,430

 

 

 

5,415

 

 

 

3.13

%

The Finance Company (3) (4)

 

Consumer Finance

 

14.02% (L + 13.25%, 13.75% Floor)

 

 

03/31/2018

 

 

2,697

 

 

 

2,697

 

 

 

2,650

 

 

 

1.53

%

The Selling Source, LLC (3) (5) (8)

 

Information and Data Services

 

 

17.00%

 

 

12/31/2017

 

 

5,155

 

 

 

4,444

 

 

 

4,201

 

 

 

2.43

%

Trilogy International Partners (6)

 

Wireless Telecommunications Services

 

 

13.38%

 

 

05/15/2019

 

 

10,000

 

 

 

10,005

 

 

 

10,250

 

 

 

5.93

%

Total 1st Lien/Senior Secured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

156,008

 

 

 

142,010

 

 

 

82.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured Debt  - 7.03%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Everi Payments, Inc.

 

Hardware

 

 

10.00%

 

 

01/15/2022

 

 

12,289

 

 

 

11,598

 

 

 

12,166

 

 

 

7.03

%

Modular Process Control, LLC (3) (5) (12)

 

Energy Efficiency Services

 

 

5.00%

 

 

04/01/2025

 

 

800

 

 

 

 

 

 

 

 

 

%

Total Unsecured Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,598

 

 

 

12,166

 

 

 

7.03

%

F-7


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

F-8


(13)

‘‘Affiliate Investments’’ are investments in tho se 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 t he voting securities of such company.

(14)

In March 2017, the Optima Specialty Steel, Inc. note was refinanced at par plus accrued interest and fees.

(15)

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2016 was 1.00%.

(16)

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

 

L = LIBOR

 

As of December 31, 2016, the 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

 

 

F-9


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-10


GREAT ELM CAPITAL CORP.

NOTES TO THE 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 provides 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 is accounting for the Merger as a business combination under Accounting Standards Codification (ASC) Section 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.

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 our accounts and the accounts of our wholly owned, or previously wholly owned subsidiaries, TransAmerican Asset Servicing Group, Inc. and FC Shale Inc.  All intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition . Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts, earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. 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.

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.

F-11


Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or cons tant-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 instru ment’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 first in first out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Use of Estimates . The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Organization and Merger Related Costs . Organization and Merger related costs, including costs relating to the formation and incorporation of the business were deemed to be incurred by the Company only subsequent to the Merger being completed. Costs incurred to the date of the Merger were contingent and charged these costs to expense as permitted under ASC 915.

Cash and Cash Equivalents . Cash and cash equivalents consist of bank demand deposits and investments in money market mutual funds. The Company considers cash and cash equivalents to include money market funds and may invest in money market funds as part of its cash management activities. As of December 31, 2016, the Company held $3,233 in cash and cash equivalents and $63,549 in money market mutual funds.

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 Director s).

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 5.

The Company values its portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our 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. However, short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, 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 our documented valuation policy that has been reviewed and approved by the Board of Directors, who also approve in good faith the valuation of such

F-12


securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do n ot 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. 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 caus e current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distre ssed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

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 independent valuation 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 and discussed 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 our portfolio in good faith based on the input of GECM, the respective independent valuation firms (to the extent applicable) and the inputs of each of the audit committee of the Board of Directors and the Board of Directors;

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.

Foreign Currency Translation . Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (i) 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 (ii) 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.

U.S. Federal Income Taxes . From inception to September 30, 2016, the Company was a taxable association under Internal Revenue Code of 1986, as amended (the Code ). The Company intends to elect to be taxed as a regulated investment company ( RIC ) under subchapter M of the Code for the partial taxable year beginning on October 1, 2016 and ending December 31, 2016. The Company intends to operate in a manner so as to qualify for the tax treatment applicable to RICs in that taxable year and all future taxable years. In order to qualify as a RIC, among other things, the Company will be required to timely distribute to its stockholders at least 90% of investment company taxable income ( ICTI) including payment-in-kind ( PIK ) interest, as defined by the Code, for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may

F-13


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 t axes on any ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s stockholders and will not be reflected in the financial statements of the Company.

If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the Minimum Distribution Amount ), the Company will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

Recent Accounting Developments.  

In November 2016, the Financial Accounting Standards Board ( FASB) issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual reporting periods beginning after December 15, 2017, 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 our 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 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 period ended December 31, 2016, management fees amounted to $392. As of December 31, 2016, $392 remained payable.

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.

F-14


Pre-Incentive Fee Net Investment Income in cludes 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 s ubsidiaries 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 o r depreciation.

Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the Accrued Unpaid Income Incentive Fees ) are deferred, on a security by security basis, and becomes payable only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (A) reduce Pre-Incentive Fee Net Investment Income and (B) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.

Under the capital gains component of the incentive fee, the Company is obligated to pay GECM at the end of each calendar year 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.

Payment of the incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20.0% 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 period ended December 31, 2016, the Company incurred Incentive Fees based on income of $863. As of December 31, 2016, $863 remained payable of which $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 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 chief investment officer of GECM, a partner in MAST Capital Management, LLC ( MAST Capital ), the investment manager of the Company’s largest stockholders, and a member of the board of directors of Great Elm Capital Group.

Administration Fees . On September 27, 2016, the Company entered into an administration agreement (the Administration Agreement ) with GECM to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping record keeping services and other administrative services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement.

GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the Compensation Expenses ), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period. The Company accrued $80 as of December 31, 2016 under the

F-15


reimbursement provision of the Administration Agreement.  GECM’s expense cap will be determined retrospectively for the year ending November 4, 2017 and as a result such amount may be reduced.

The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.

For the period ended December 31, 2016, the Company incurred expenses under the Administration Agreement of $224. As of December 31, 2016, $138 remained payable.

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.

F-16


 

The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 3 Instruments.

Level 3 Instruments Valuation Techniques and Significant Inputs

 

Bank Loans, Corporate Debt, and Other Debt Obligations

 

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.

 

The table below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets and liabilities as of December 31, 2016. 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 and liabilities.

 

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

Discounted cash flows:

 Discount Rate

Comparable multiples:

 EV/EBITDA 4

Liquidation/Waterfall analysis:

 EV/EBITDA 4

 

11.85% - 39.80% (16.33%)

 

3.50 - 6.35 (5.76)

Unsecured Debt

$0

Liquidation Value

$0 - $0 ($0)

Equity

Common Stock, LLC Units and Warrants on private stock

$314

$68

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.

F-17


3

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

4

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization.

As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of December 31, 2016. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment (if any), call provisions and comparable company valuations. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively, in the fair value.

The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of 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 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

 

 

Transfers

In

 

 

Transfers

Out

 

 

Ending

Balance

as of

December 31, 2016

 

1st Lien/Senior

   Secured and Unsecured Debt

 

$

88,849

 

 

$

35,771

 

 

$

274

 

 

$

(926

)

 

$

(41,738

)

 

$

1,749

 

 

$

 

 

$

 

 

$

83,979

 

Equity/Other

 

 

526

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

501

 

Total investment

   assets

 

$

89,375

 

 

$

35,771

 

 

$

274

 

 

$

(951

)

 

$

(41,738

)

 

$

1,749

 

 

$

 

 

$

 

 

$

84,480

 

 

(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, 2016 totaled $(951) consisting of the following: 1st Lien/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. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.

5. DEBT

Notes Payable.   On November 3, 2016, the Company assumed $33,646 of Full Circle 8.25% Senior Notes due 2020 (the “Notes”) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016.

The Notes were initially issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively with the second supplemental indenture, the Indenture ), between Full Circle Capital Corporation 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

F-18


subordinated i n 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 unse cured 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 ve hicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a fixed rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Company’s option. The Investment Company Act limits, with 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, 2016, the C ompany’s outstanding borrowings were $33,646, and the Company’s asset coverage ratio was 6 to 1.

Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following tables as of 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

$

33,646

 

 

$

6.170

 

 

$

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.

(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 since November 4, 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. 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 December 31, 2016, the Company had not repurchased any of the Notes.

The summary information of the Notes for the period ended December 31, 2016, is as follows:

 

 

 

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

 

 

F-19


6. COMMITMENTS AND CONTINGENCIES

MAST Capital and Great Elm Capital Group have incurred all organization, transaction-related and offering costs on behalf of the Company which are estimated at approximately $3,471, through December 31, 2016. Following completion of the Merger, the Company’s obligation to reimburse such costs as described in Note 8 became non-contingent, fixed and determinable.

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, 2016, the Company had approximately $2.5 million in unfunded loan commitments, subject to the Company’s approval in certain instances, to provide debt financing to certain of its portfolio companies.

Two complaints, captioned Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation , et al., filed on September 23, 2016 (the Saunders Action ), and William L. Russell, Jr., individually and on behalf of all others similarly situated, v. Biderman, et al. filed on September 12, 2016 and amended on September 22, 2016 (the Russell Action ), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the Circuit Court ), respectively. On October 7, 2016, a complaint captioned David Speiser, individually and on behalf of all others similarly situated v. Felton, et al., was filed in the Circuit Court (the Speiser Action , and together with the Saunders Action and the Russell Action, the Actions ).

On October 24, 2016, the Company, Full Circle, Great Elm Capital Group, MAST Capital, certain directors of the Full Circle and plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the MOU ). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and the Company agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the Stipulation ) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.

7. INDEMFICATION

Under the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business the Company expects to enter into contracts that contain a variety of representations which provide general indemnifications. The Company’s maximum exposure under these agreements cannot be known; however, the Company expects any risk of loss to be remote.

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

F-20


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 represen tative of fair value as of November 1, 2016, and the total is included in the accompanying consolidated statement of changes as “Shares issued – formation transactions.”

As of November 3, 2016, the Initial GECC Portfolio was comprised of:

 

Portfolio Company

 

Industry

 

Type of

Investment

 

Interest

 

 

Maturity

 

Par Amount/

Quantity

 

 

Cost

 

 

Fair Value

 

Avanti Communications

   Group plc

 

Wireless Telecommunications Services

 

Sr. Secured Notes

 

 

10.00

%

 

10-1-19

 

$

70,035

 

 

$

54,629

 

 

$

53,577

 

Everi Payments Inc.

 

Hardware

 

Sr. Unsecured Notes

 

 

10.00

%

 

1-15-22

 

$

12,289

 

 

 

11,581

 

 

 

11,705

 

Optima Specialty Steel

   Inc.

 

Metals and Mining

 

Sr. Secured Notes

 

 

12.50

%

 

12-15-16

 

$

15,100

 

 

 

13,726

 

 

 

14,164

 

Tallage Lincoln, LLC

 

Real Estate Services

 

Sr. Secured Term Loan

 

 

10.00

%

 

5-21-18

 

$

372

 

 

 

372

 

 

 

372

 

Tallage Adams, LLC

 

Real Estate Services

 

Sr. Secured Term Loan

 

 

10.00

%

 

12-12-16

 

$

169

 

 

 

181

 

 

 

181

 

Trilogy International

   Partners

 

Wireless Telecommunications Services

 

Sr. Secured Notes

 

 

13.375

%

 

5-15-19

 

$

10,000

 

 

 

10,005

 

 

 

10,000

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

90,494

 

 

$

89,999

 

 

In the Subscription Agreement, the Company agreed, to reimburse costs associated with the transactions contemplated by the Subscription Agreement and the Merger Agreement incurred by Great Elm Capital Group and the MAST Funds, if the transaction closed. See Note 6.

Merger

On June 23, 2016, the Company entered into the Merger Agreement with Full Circle.  Following approval of the Merger on October 31, 2016 by Full 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.

F-21


The Company has ac counted 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 ne t assets and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than the fair value of the merger consideration paid by the Company. The calculation of the purchase accounting loss is detailed in the table below.

 

Consideration Paid:

 

 

 

 

Common stock issued

 

$

73,541

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

 

29,109

 

Investments

 

 

74,658

 

Other assets

 

 

2,252

 

Liabilities assumed:

 

 

 

 

Notes payable

 

 

(34,574

)

Other liabilities

 

 

(2,600

)

Net assets acquired

 

 

68,845

 

Purchase accounting loss

 

$

4,698

 

 

The Company incurred approximately $3,471 of transaction-related expenses related to the Formation Transaction and Merger during the period ended December 31, 2016.  Transaction-related expenses are comprised primarily of legal, accounting and other professional fees and third party costs.

The following table provides the pro forma consolidated operational data as if the Merger had occurred on January 1, 2016 and we were in operations for the full year.  The pro forma consolidated operational data is based on assumptions and estimates; however, these pro forma results are not indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the period presented, nor do they purport to represent the consolidated results of operations for future periods. Information presented for the year ended December 31, 2015 represents Full 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

)

 

 

F-22


Issuer Purchases of Equity Securities

In the prospectus for the Merger, we announced that we would initiate a stock purchase program. For the quarter ended December 31, 2016, we purchased 98,172 shares under our stock buyback program at a weighted average price of $10.73 per share. As of March 24, 2017, we have cumulatively purchased 338,306 shares under our stock buyback program at the weighted average price of $11.18 per share, resulting in $3.8 million of cumulative cash paid, under the program since November 4, 2016.

 

Month

 

Total Number of Shares Purchased

 

 

Average Price Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Program

 

 

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

November 2016

 

 

16,030

 

 

$

10.79

 

 

 

16,030

 

 

$

14,827

 

December 2016

 

 

82,142

 

 

$

10.72

 

 

 

82,142

 

 

$

13,946

 

Total

 

 

98,172

 

 

$

10.73

 

 

 

98,172

 

 

 

 

 

 

9. EARNINGS PER SHARE

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

)

 

Diluted earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the periods presented.  Weighted average shares outstanding represents the weighted average shares outstanding after giving effect to the Merger and Formation Transactions, and as such is calculated from November 3, 2016 through December 31, 2016.

10. TAX INFORMATION

The tax character of distributions during the period ended December 31, 2016, were as follows:

 

 

 

Period Ended

 

 

 

December 31, 2016

 

Distributions paid from:

 

 

 

 

Ordinary Income

 

$

2,123

 

Net Long-Term Capital Gains

 

$

0

 

Total Taxable Distributions

 

$

2,123

 

 

F-23


As of December 31, 2016, the components of Distributable Earnings (Losses) on a tax basis were as follows:

 

 

 

December 31, 2016

 

Undistributed Ordinary Income - net

 

$

1,781

 

Capital Loss Carryforwards

 

$

(41,842

)

Total Undistributed Earnings

 

$

(40,061

)

Unrealized Earnings (Losses) - net

 

$

(6,402

)

Total Accumulated Earnings (Losses) - net

 

$

(46,463

)

 

As of December 31, 2016, 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, 2016

 

Tax cost

 

$

224,762

 

Gross unrealized appreciation

 

$

1,837

 

Gross unrealized depreciation

 

$

(8,239

)

Net unrealized depreciation on

   investments

 

$

(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, 2016

 

Paid-in capital in excess of par

 

$

26,464

 

Accumulated undistributed net investment income

 

$

3,454

 

Accumulated net realized gain (loss)

 

$

(29,918

)

 

At December 31, 2016, the Company, for federal income tax purposes, had capital loss carryforwards of $41,842 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the 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, 2016, $34,502 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2016, $7,651 are short-term and $34,191 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.

F-24


11. FINANCIAL HIGHLIGHTS

Below is the schedule of financial highlights of the Company for the period ended December 31, 2016:

 

 

 

November 4, 2016

(Commencement of Operations) to

December 31, 2016

 

Per Share Data: (1)

 

 

 

 

Net asset value, beginning of period

 

$

14.41

 

Net investment income

 

 

0.28

 

Net realized gains

 

 

0.02

 

Net unrealized losses

 

 

(1.05

)

Net decrease in net assets resulting from operations

 

 

(0.75

)

Accretion from share buybacks

 

 

0.03

 

Distributions declared from net investment

   income (2)

 

 

(0.17

)

Distributions declared from net realized gains (2)

 

 

 

Net decrease resulting from distributions to

   common stockholders

 

 

(0.17

)

Net asset value, end of period

 

$

13.52

 

 

 

 

 

 

Shares outstanding, end of year/period

 

 

12,791

 

Total return based on net asset value (3)

 

 

(5.30

)%

Total return based on market value (3)

 

 

(2.03

)%

 

 

 

 

 

Ratio/Supplemental Data (all amounts in

   thousands except ratios):

 

 

 

 

Net assets, end of period

 

$

172,984

 

Average net assets

 

$

179,366

 

Ratio of expenses (without management fees,

   incentive fees and interest and credit facility

   expenses) to average net assets (4)

 

 

2.45

%

Ratio of management fees to average net assets (4)

 

 

1.38

%

Ratio of interest and credit facility expenses to

   average net assets (4)

 

 

1.48

%

Ratio of incentive fees to average net assets (4)

 

 

3.04

%

Ratio of total expenses to average net assets before

   waiver (4)

 

 

8.35

%

Ratio of total expenses to average net assets after

   waiver (4)

 

 

8.07

%

Ratio of net investment income to average net

   assets (4)

 

 

12.44

%

Portfolio turnover

 

 

27

%

Average net assets per share of market value at the

   end of the period

 

 

 

 

 

(1)

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

(2)

The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.

(3)

Total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming the Company’s distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming the Company’s distributions were reinvested through its dividend reinvestment plan, and is assumed to be $12.03 on November 4, 2016.  $12.03 represents the closing

F-25


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.

12. AFFILIATED INVESTMENTS

Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company's outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at December 31, 2016 represented 2.48% of the Company's net assets. Fair value as of December 31, 2016 along with transactions during the year ended December 31, 2016 in these affiliated investments was as follows:

 

 

 

 

 

 

 

Period Ended December 31, 2016

 

 

 

 

 

 

Period Ended December 31, 2016

 

Non-Controlled, Affiliated Investments

 

Fair Value at

April 22,

2016

 

 

Gross

Additions

(Cost)*

 

 

Gross

Reductions

(Cost)**

 

 

Net

Unrealized

Gain (Loss)

 

 

Fair Value at

December 31,

2016

 

 

Net Realized

Gain (Loss)

 

 

Interest

Income

 

 

Fee

Income

 

 

Dividend

Income

 

OPS Acquisitions Limited

   and Ocean Protection

   Services Limited

 

$

 

 

$

4,294

 

 

$

(40

)

 

$

32

 

 

$

4,286

 

 

$

 

 

$

89

 

 

$

 

 

$

 

Totals

 

$

 

 

$

4,294

 

 

$

(40

)

 

$

32

 

 

$

4,286

 

 

$

 

 

$

89

 

 

$

 

 

$

 

 

*

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

**

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

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, 2016 represented 0.04% of the Company's net assets. Fair value as of December 31, 2016 along with transactions during the year ended December 31, 2016 in these controlled investments was as follows:

 

 

 

 

 

 

 

Period Ended December 31, 2016

 

 

 

 

 

 

Period Ended December 31, 2016

 

Controlled Investments

 

Fair   Value at

April 22,

2016

 

 

Gross

Additions

(Cost)*

 

 

Gross

Reductions

(Cost)**

 

 

Net

Unrealized

Gain (Loss)

 

 

Fair Value at

December 31,

2016

 

 

Net Realized

Gain (Loss)

 

 

Interest

Income

 

 

Fee

Income

 

 

Dividend

Income

 

Texas Westchester

   Financial, LLC

 

$

 

 

$

68

 

 

$

 

 

$

 

 

$

68

 

 

$

 

 

$

 

 

$

 

 

$

 

Totals

 

$

 

 

$

68

 

 

$

 

 

$

 

 

$

68

 

 

$

 

 

$

 

 

$

 

 

$

 

 

*

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

**

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

F-26


13. SELECTED QUARTERLY F INANCIAL DATA (Unaudited)

The following are the quarterly results of operations for the year ended December 31, 2016. 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, 2016 (1)

 

 

September 30, 2016

 

 

June 30, 2016

 

Investment income

 

$

5,831

 

 

$

 

 

$

 

Net investment income

 

 

5

 

 

 

 

 

 

 

Net realized and unrealized losses

 

 

(17,879

)

 

 

 

 

 

 

Net decrease in net assets resulting from

   operations

 

 

(17,874

)

 

 

 

 

 

 

Basic and diluted earnings (losses) per common

   share

 

 

(1.39

)

 

 

 

 

 

 

Net asset value per common share at end of

   quarter

 

 

13.52

 

 

 

 

 

 

 

 

(1)

Partial quarter for the period from November 4, 2016 through December 31, 2016.

14.

SUBSEQUENT EVENTS

Subsequent events after the have been evaluated through March 29, 2017. Other than the items discussed below, the Company has concluded that there is no impact requiring adjustment or disclosure in the consolidated financial statements.

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 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 has 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.  The Company continues to hold $47,200 of the Existing Notes.

In January 2017, the Company purchased an aggregate of $8,000 face value of Nana Development Corp senior secured bonds.  The bonds have a coupon of 9.50% and mature March 15, 2019.

In January and February 2017, the Company sold all of its holdings in Trilogy International Partners, LLC.  We recognized approximately $290 of realized gain on the sales.

In February 2017, the Company sold its loan to JN Medical Corporation for total consideration, including payment for expenses due under the loan agreement of $3,000.  The Company recognized approximately $1,000 of gain on the sale.

In February 2017, the Company’s loans to RiceBran Technologies Corporation were paid off at par plus accrued interest and fees.

In February 2017, certain assets of Pristine Environments were acquired by a newly-formed, wholly owned subsidiary of the Company, PE Facility Solutions LLC. The proceeds of the asset acquisition were used by Pristine Environments to repay all but $500 of our outstanding credit facility.

In March 2017, the Company’s holdings in the 12.50% Senior Secured Notes of Optima Specialty Steel were refinanced at par plus accrued interest of approximately $15.3 million following bankruptcy court approval of Optima’s debtor-in-possession financing, resulting in the reversal of the unrealized loss of approximately $1.2 million at December 31, 2016. The Company received an approximately $12.7 million allocation of such debtor-in-possession facility.

F-27


The Company’s board of directors declared the monthly distributions for the second quarter of 2017 at an annual rate of approximately 7.39% of 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 28, 2017

May 15, 2017

May

$0.083

May 31, 2017

June 15, 2017

June

$0.083

June 30, 2017

July 14, 2017

 

 

 

 

F-28


Exhibit Index

Unless otherwise indicated, all references are to exhibits to the applicable filing by Great Elm Capital Corp. (the “Registrant”) under File No. 814-01211 with the Securities and Exchange Commission.

 

Exhibit

Number

 

Description

 

 

 

 

2.1

 

Agreement and Plan of Merger, dated as of June 23, 2016, by and between Full Circle Capital Corporation (“Full Circle”) and the Registrant (incorporated by reference to the Rule 425 filing on June 27, 2016)

 

 

 

2.2

 

Subscription Agreement, dated as of June 23, 2016, by and among the Registrant, Great Elm Capital Group, Inc. and the investment funds signatory thereto (incorporated by reference to the Rule 425 filing on June 27, 2016)

 

 

 

3.1

 

Amended and Restated Charter of the Registrant (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on November 7, 2016)

 

 

 

3.2

 

Bylaws of the Registrant (incorporated by reference to Exhibit 2 to the Form N-14 (File No. 333-212817) filed on August 1, 2016)

 

 

 

4.1

 

Form of certificate for the Registrant’s common stock (incorporated by reference to Exhibit 99.5 to the Registration Statement on Form N-14 (File No. 333-212817) filed on August 1, 2016)

 

 

 

4.2

 

8.25% Senior Note due 2020 (incorporated by reference to Exhibit 3.3 to the Form 8-K filed on November 7, 2016)

 

 

 

4.3

 

Indenture, dated as of June 3, 2013, by and between the Registrant and U.S. Bank National Association, as trustee (the “Trustee”) (incorporated by reference to Full Circle’s Amendment No. 1 to Form N-2 (File No. 333-188280) filed on June 11, 2013).

 

 

 

4.4

 

First Supplemental Indenture, dated as of June 3, 2013, by and between Full Circle and the Trustee (incorporated by reference to Full Circle’s Amendment No. 2 Form N-2 (File No. 333-188280) filed on June 19, 2013)

 

 

 

4.5*

 

Second Supplemental Indenture, dated as of November 3, 2016 by and among Full Circle, the Registrant and the Trustee.

 

 

 

9.1

 

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)

 

 

 

10.1

 

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)

 

 

 

10.2

 

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)

 

 

 

10.3*

 

Custodian Agreement, dated as of October 27, 2016 by and between the Registrant and State Street Bank & Trust Company.

 

 

 

10.4

 

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 to the Form 8-K filed on November 7, 2016)

 

 

 

14.1*

 

Code of Ethics

 

 

 

14.2*

 

Code of Ethics of Great Elm Capital Management, Inc.

 

 

 

21.1*

 

Subsidiaries of the Registrant

 

 

 

31.1*

 

Certification of the Registrant’s Chief Executive Officer (“CEO”)

 

 

 

31.2*

 

Certification of the Registrant’s Chief Financial Officer (“CFO”)

 

 

 

32.1*

 

Certification of the Registrant’s CEO and CFO

 

*

Filed herewith

 

 

Exhibit 4.5

SECOND SUPPLEMENTAL INDENTURE

by and among

FULL CIRCLE CAPITAL CORPORATION,

GREAT ELM CAPITAL CORP.

and

U.S. BANK NATIONAL ASSOCIATION,

as Trustee

Dated as of November 3, 2016

 

 

 


 

SECOND SUPPLEMENTAL INDENTURE

This SECOND SUPPLEMENTAL INDENTURE (this “ Second Supplemental Indenture ”), dated as of November 3, 2016, is by and among Full Circle Capital Corporation a Maryland corporation (the “ Company ”), Great Elm Capital Corp., a Maryland corporation (“ Successor ”), and U.S. Bank National Association, as trustee under the Indenture referred to below (the “ Trustee ”). All capitalized terms used herein shall have the meaning set forth in the Base Indenture (as defined below).

RECITALS OF THE COMPANY

WHEREAS, the Company and Trustee executed and delivered an indenture, dated as of June 3, 2013, (the “ Base 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 Base Indenture;

WHEREAS, the Company and Trustee executed and delivered a first supplemental indenture (the “ First Supplemental Indenture ” and, together with the Base Indenture and the Second Supplemental Indenture, the “ Indenture ”), dated as of June 28, 2013, providing for the issuance of the Company’s 8.25% Senior Notes due June 30, 2020 (the “ Notes ”);

WHEREAS, the Notes bear a CUSIP number of 359671 203 and an ISIN number of US3596712030;

WHEREAS, the Company and Successor have entered into an agreement and plan of merger, dated as of June 23, 2016 (the “ Merger Agreement ”), which provides for the merger of Company with and into Successor (the “ Merger ”), with Successor continuing its existence under Maryland law;

WHEREAS, the Merger shall become effective at 11:59 p.m. on the date of the filing of the articles of merger with the Department of Assessments and Taxation (the “ Department ”) of the State of Maryland;

WHEREAS, the Notes shall require a new CUSIP number and ISIN number;

WHEREAS, Section 801 of the Base Indenture provides, among other things, that Company shall not merge with or into any other entity unless the entity formed by such consolidation or into which the Company is merged shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest, if any, on the Notes and the performance of every covenant of the Base Indenture and the First Supplemental Indenture on the part of the Company to be performed or observed;

WHEREAS, Section 802 of the Base Indenture provides that upon any merger of the Company in accordance with Section 801 of the Base Indenture, the successor entity into which the Company is merged shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Base Indenture and the First Supplemental Indenture with the same effect as if such successor had been named as the Company under the Base

 


 

Indenture and the First Supplemental Indenture and the Company shall be discharged from all obligations and covenants under the Base Indenture, the First Supplemental Indenture and the Securities, including the Notes, and may be dissolved and liquidated;

WHEREAS, each of the Company and the Successor has been duly authorized to enter into this Second Supplemental Indenture; and

WHEREAS, all acts, conditions, proceedings and requirements necessary to make this Second Supplemental Indenture a valid, binding and legal agreement enforceable in accordance with its terms for the purposes expressed herein, in accordance with its terms, have been duly done and performed.

NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, Successor and the Trustee hereby agree as follows:

Article I

REPRESENTATIONS AND WARRANTIES

SECTION 1.1 . Representations of Company and Successor .

Each of the Company and Successor represents and warrants to the Trustee as follows:

(a) It is a Maryland corporation duly organized, validly existing and in good standing under the laws of the State of Maryland.

(b) The execution, delivery and performance by it of this Second Supplemental Indenture have been authorized and approved by all necessary corporate action on its part.

(c) Upon the filing and acceptance for record of the articles of merger by the Department of the State of Maryland or at such other time thereafter as is provided in the articles of merger (the “ Merger Effective Time ”), the Merger will be effective in accordance with the terms of the Merger Agreement and Maryland law.

Article Ii

ASSUMPTION AND AGREEMENT OF SUCCESSOR

SECTION 2.1 . Assumption and Agreement of Successor .

(a) In accordance with Section 801 of the Base Indenture, Successor hereby expressly assumes all of the obligations of Company under the Base Indenture and the First Supplemental Indenture, including but not limited to the due and punctual payment of the principal of (and premium, if any) and interest, if any, on the Notes and the performance of every covenant of the Base Indenture and the First Supplemental Indenture on the part of the Company to be performed or observed.

(b) Successor shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Base Indenture and the First Supplemental Indenture with the same effect as if Successor had been named as the “Company” in the Base Indenture and the

 


 

First Supplemental Indenture; and thereafter the Company shall be fully released from its obligations under the Base Indenture and the First Supplemental Indenture.

Article IiI

TERMS OF THE NOTES

SECTION 3.1 . Terms of the Notes . 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 1.01(a) of the First Supplemental Indenture shall be amended by replacing such Section thereof with the following:

“The Notes shall constitute a series of Senior Securities having the title “8.25% Senior Notes due June 30, 2020.” The Notes shall bear a CUSIP number of 390320 208 and an ISIN number of US3903202089.”

Article IV

miscellaneous

SECTION 4.1 . Capitalized Terms . C apitalized terms used herein without definition shall have the meaning assigned to them in the Base Indenture as supplemented by the First Supplemental Indenture.

SECTION 4.2 . Effective Time . This Second Supplemental Indenture shall become effective as of the Merger Effective Time.

SECTION 4.3 . Governing Law . This Second Supplemental Indenture 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 Second 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 4.4 . Severability . In case any provision in this Second Supplemental Indenture 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 and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability.

SECTION 4.5 . Effects of the Indenture and the Notes . Except as expressly amended hereby, the Base Indenture, as supplemented and amended by the First Supplemental Indenture and by this Second Supplemental Indenture shall be read, taken and construed as one and the same instrument with respect to the Notes. All provisions included in this Second Supplemental Indenture supersede any conflicting provisions included in the Base Indenture and the First Supplemental Indenture with respect to the Notes, unless not permitted by law. The Trustee accepts the trusts created by the Base Indenture, as supplemented by the First Supplemental Indenture and by this Second Supplemental Indenture, and agrees to perform the same upon the terms and conditions of the Base Indenture and the First Supplemental Indenture as supplemented by this Second Supplemental Indenture.

 


 

This Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Notes heretofore or hereafter authenticated and delivered shall be bound hereby.

SECTION 4.6 . Counterparts . This Second 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 Second Supplemental Indenture. The exchanges of copies of this Second Supplemental Indenture and of signatures by facsimile, .pdf transmission, email or other electronic means shall constitute effective execution and delivery of this Second 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 4.7 . Headings . The headings of the Sections of this Second Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Second Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof.

[Signature Page Follows]

 

 

 


 

IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed, all as of the date first above written.

 

FULL CIRCLE CAPITAL CORPORATION

 

 

 

 

 

By:

 

/s/ Michael J. Sell

 

 

Name:

 

Michael J. Sell

 

 

Title:

 

Chief Financial Officer, Treasurer and Secretary

 

 


 

 

GREAT ELM CAPITAL CORP.

 

 

 

 

 

By:

 

/s/ Peter A. Reed

 

 

Name:

 

Peter A. Reed

 

 

Title:

 

Chief Executive Officer

 

 


 

 

U.S. BANK NATIONAL ASSOCIATION, as Trustee

 

 

 

 

 

By:

 

/s/ Karen R. Beard

 

 

Name:

 

Karen R. Beard

 

 

Title:

 

Vice President

 

 

 

Exhibit 10.3

 

Execution Version

Custodian Agreement

This Agreement is made as of October 27, 2016 (this “ Agreement ”),by and between Great Elm Capital Corp., a corporation organized and existing under the laws of Maryland (the “ Fund ”) and State Street Bank and Trust Company, a Massachusetts trust company (the “ Custodian ”).

W itnesseth:

W hereas , the Fund desires for the Custodian to provide certain custodial services relating to securities and other assets of the Fund; and

W hereas , the Custodian is willing to provide the services upon the terms contained in this Agreement;

Section 1 . D efinitions .   In addition to terms defined in Section 4.1 (Rule 17f-5 and Rule 17f-7 related definitions) or elsewhere in this Agreement, (a) terms defined in the UCC have the same meanings herein as therein and (b) the following other terms have the following meanings for purposes of this Agreement:

1940 Act ” means the Investment Company Act of 1940, as amended from time to time.

Board ” means, in relation to the Fund, the board of directors, trustees or other governing body of the Fund.

Client Publications ” means the general client publications of State Street Bank and Trust Company available from time to time to clients and their investment managers.

Deposit Account Agreement ” means the Deposit Account Agreement and Disclosure, as may be amended from time to time, issued by the Custodian and available on the Custodian’s internet customer portal, “my.statestreet.com”.

Domestic securities ” means securities held within the United States.

Foreign securities ” means securities held primarily outside of the United States.

Fund Interests ” means beneficial interests in the Fund.

Held outside of the United States ” means not held within the United States.

Held within the United States” means (a) in relation to a security or other financial asset, the security or other financial asset (i) is a certificated security registered in the name of the Custodian or its sub-custodian, agent or nominee or is endorsed to the Custodian or its sub-custodian, agent or nominee or in blank and the security certificate is located within the United States, (ii) is an uncertificated security or other financial asset registered in the name of the Custodian or its sub-custodian, agent or nominee at an office located in the United States, or (iii) has given rise to a security entitlement of which the Custodian or its sub-custodian, agent or nominee is the entitlement holder against a U.S. Securities System or another securities intermediary for which the securities intermediary’s jurisdiction is within the United States, and (b) in relation to cash, the cash is maintained in a deposit account denominated in U.S. dollars with the banking department of the Custodian or with another bank or trust company’s office located in the United States.

Investment Advisor ” means the investment manager or investment advisor of the Fund.

On book currency ” means (a) U.S. dollars or (b) a foreign currency that, when credited to a deposit account of a customer maintained in the banking department of the Custodian or an Eligible Foreign Custodian, the Custodian maintains on its books as an amount owing as a liability by the Custodian to the customer.

 


 

Proper Instructions ” means instructions in accordance with Section 10 received by the Custodian from the Fund, the Fund’s Investment Advisor, or an individual or organization duly authorized by the Fund or the Investment Advisor.  The term includes standing instructions.

SEC ” means the U.S. Securities and Exchange Commission.

UCC ” means the Uniform Commercial Code of the Commonwealth of Massachusetts as in effect from time to time.

Underlying Portfolios ” means a group of investment companies as defined in Section 12(d)(1)(F) of the 1940 Act.

Underlying Shares ” means shares or other securities, issued by a U.S. issuer, of Underlying Portfolios and other registered “investment companies” (as defined in Section 3(a)(1) of the 1940 Act), whether or not in the same “group of investment companies” (as defined in Section 12(d)(1)(G)(ii) of the 1940 Act).

Underlying Transfer Agent ” means State Street Bank and Trust Company or such other organization which may from time to time be appointed by the Fund to act as a transfer agent for the Underlying Portfolios and with respect to which the Custodian is provided with Proper Instructions.

U.S. Securities System ” means a securities depository or book-entry system authorized by the U.S. Department of the Treasury or a “clearing corporation” as defined in Section 8-102 of the UCC.

S ection 2. E mployment of Custodian .

S ection 2.1 General .  The Fund hereby employs the Custodian as a custodian of (a) securities and cash of each of the Fund and (b) other assets of the Fund that the Custodian agrees to treat as financial assets.  The Fund agrees to deliver to the Custodian (i) all securities and cash of the Fund, (ii) all other assets of the Fund that it desires the Custodian, and the Custodian is willing, to treat as a financial asset and (iii) all cash and other proceeds of the securities and financial assets held in custody under this Agreement.  The holding of confirmation statements that identify Underlying Shares as being recorded in the Custodian’s name on behalf of the Fund will be custody for purposes of this Section 2.1.  This Agreement does not require the Custodian to accept an asset for custody hereunder or to treat any asset that is not a security as a financial asset.

S ection 2.2 Sub-custodians .  Upon receipt of Proper Instructions, the Custodian shall on behalf of the Fund appoint one or more banks, trust companies or other entities located in the United States and designated in the Proper Instructions to act as a sub-custodian for the purposes of effecting such transactions as may be designated by the Fund in the Proper Instructions.  The Custodian may place and maintain the Fund’s foreign securities with foreign banking institution sub-custodians employed by the Custodian or foreign securities depositories, all in accordance with the applicable provisions of Sections 4 and 5.  An entity acting in the capacity of Underlying Transfer Agent is not an agent or sub-custodian of the Custodian for purposes of this Agreement.

S ection 2.3 Relationship .  With respect to securities and other financial assets, the Custodian is a securities intermediary and the Fund is the entitlement holder.  With respect to cash maintained in a deposit account and denominated in an “on book” currency, the Custodian is a bank and the Fund is the bank’s customer.  If cash is maintained in a deposit account with a bank other than the Custodian and the cash is denominated in an “on book” currency, the Custodian is that bank’s customer.  The Custodian agrees to treat the claim to the cash as a financial asset for the benefit of the Fund.  The Custodian does not otherwise agree to treat cash as financial asset.  The duties of the Custodian as securities intermediary and bank set forth in the UCC are varied by the terms of this Agreement to the extent that the duties may be varied by agreement under the UCC.

Section 3.

Activities of the Custodian with Respect to Property Held in the United States .

Section 3.1 Holding Securities .  The Custodian may deposit and maintain securities or other financial assets of the Fund in a U.S. Securities System in compliance with the conditions of Rule 17f-4 under the 1940 Act.  Upon receipt of Proper Instructions on behalf of the Fund, the Custodian shall establish and maintain a segregated

 

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account or accounts for and on behalf of the Fund and into which account or accounts may be transferred cash or securities and other financial assets, including securities and financial assets maintained in a U.S. Securities System.  The Custodian shall hold and physically segregate for the account of the Fund all securities and other financial assets held by the Custodian in the United States, including all domestic securities of the Fund, other than (a) securities or other financial assets maintained in a U.S. Securities System and (b) Underlying Shares maintained pursuant to Section 3.6 in an account of an Underlying Transfer Agent.  The Custodian may at any time or times in its discretion appoint any other bank or trust company, qualified under the 1940 Act to act as a custodian, as the Custodian’s agent to carry out such of the provisions of this Section as the Custodian may from time to time direct.  The appointment of any agent shall not relieve the Custodian of any of its duties hereunder.  The Custodian may at any time or times in its discretion remove the bank or trust company as the Custodian’s agent.

Section 3.2 Registration of Securities .  Domestic securities or other financial assets held by the Custodian and that are not bearer securities shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian, or in the name or nominee name of any agent or any sub-custodian permitted hereby.  All securities accepted by the Custodian on behalf of the Fund under the terms of this Agreement shall be in “street name” or other good delivery form.  However, if the Fund directs the Custodian to maintain securities or other financial assets in “street name,” the Custodian shall utilize reasonable efforts only to timely collect income due the Fund on the securities and other financial assets and to notify the Fund of relevant issuer actions including, without limitation, pendency of calls, maturities, tender or exchange offers.

Section 3.3 Bank Accounts .  The Custodian shall open and maintain upon the terms of the Deposit Account Agreement a separate deposit account or accounts in the United States in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement.  The Custodian shall credit to the deposit account or accounts, subject to the provisions hereof, all cash received by the Custodian from or for the account of the Fund, other than cash maintained by the Fund in a deposit account established and used in accordance with Rule 17f-3 under the 1940 Act.  Funds held by the Custodian for the Fund may be deposited by the Custodian to its credit as Custodian in the banking department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that (a) every such bank or trust company shall be qualified to act as a custodian under the 1940 Act and (b) each such bank or trust company and the funds to be deposited with each such bank or trust company shall on behalf of the Fund be approved by vote of a majority of the Fund’s Board.  The funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.

Section 3.4 Collection of Income .  Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall collect on a timely basis all income and other payments with respect to the securities and other financial assets and to which the Fund shall be entitled either by law or pursuant to custom in the securities business. The Custodian shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, the securities are held by the Custodian or its agent.  The Custodian shall present for payment all income items requiring presentation as and when they become due and shall collect interest when due on securities and other financial assets held hereunder.  The Custodian shall credit income to the Fund as such income is received or in accordance with the Custodian’s then current payable date income schedule.  Any credit to the Fund in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Fund may be charged at the Custodian’s applicable rate for time credited.

Section 3.5 Delivery Out .  The Custodian shall release and deliver out domestic securities and other financial assets of the Fund held in a U.S. Securities System, or in an account at the Underlying Transfer Agent, only upon receipt of Proper Instructions on behalf of the Fund, specifying the domestic securities or financial assets held in the United States  to be delivered out and the person or persons to whom delivery is to be made.  The Custodian shall pay out cash of the Fund upon receipt of Proper Instructions on behalf of the Fund, specifying the amount of the payment and the person or persons to whom the payment is to be made.

 

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Section 3.6 Deposit of Fund Assets with the Underlying Transfer Agent .  Underlying Shares of the Fund shall be deposited and held in an account or accounts maintained with an Underlying Transfer Agent.  The Custodian’s only responsibilities with respect to the Underlying Shares shall be limited to the following:

 

1)

Upon receipt of a confirmation or statement from an Underlying Transfer Agent that the Underlying Transfer Agent is holding or maintaining Underlying Shares in the name of the Custodian (or a nominee of the Custodian) for the benefit of the Fund, the Custodian shall identify by book-entry that the Underlying Shares are being held by it as custodian for the benefit of the Fund.

 

2)

Upon receipt of Proper Instructions to purchase Underlying Shares for the account of the Fund, the Custodian shall pay out cash of the Fund as so directed to purchase the Underlying Shares and record the payment from the account of the Fund on the Custodian’s books and records.

 

3)

Upon receipt of Proper Instructions for the sale or redemption of Underlying Shares for the account of the Fund, the Custodian shall transfer the Underlying Shares as so directed to sell or redeem the Underlying Shares, record the transfer from the account of the Fund on the Custodian’s books and records and, upon the Custodian’s receipt of the proceeds of the sale or redemption, record the receipt of the proceeds for the account of the Fund on the Custodian’s books and records.

Section 3.7 Proxies .  The Custodian shall cause to be promptly executed by the registered holder of domestic securities or other financial assets held in the United States of the Fund, if the securities or other financial assets are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which the proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to the securities or other financial assets.

Section 3.8 Communications .  Subject to the domestic securities or other financial assets held in the United States being registered as provided in Section 3.2, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities and other financial assets being held for the Fund.  The Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities and other financial assets whose tender or exchange is sought and from the party or its agent making the tender or exchange offer.  The Custodian shall also transmit promptly to the Fund all written information received by the Custodian regarding any class action or other collective litigation relating to Fund securities or other financial assets issued in the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian for the account of the Fund, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by the Fund beyond such forwarding of written information received by the Custodian.

Section 4 . Provisions Relating to Rules 17f-5 and 17f-7 .

Section 4.1. Definitions.   As used in this Agreement, the following terms have the following meanings:

Country Risk ” means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country.  The factors include but are not limited to risks arising from the country’s political environment, economic and financial infrastructure (including any Eligible Securities Depository operating in the country); prevailing or developing custody, tax and settlement practices; nationalization, expropriation or other  government actions; currency restrictions, devaluations or fluctuations; market conditions affecting the orderly execution of securities transactions or the value of assets; the  regulation of the banking and securities industries, including changes in market rules; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country.

Covered Foreign Country ” means a country listed on Schedule A, which list of countries may be amended from time to time at the request of the Fund and with the agreement of the Foreign Custody Manager.

Eligible Foreign Custodian ” has the meaning set forth in Section (a)(1) of Rule 17f-5.

Eligible Securities Depository ” has the meaning set forth in section (b)(1) of Rule 17f-7.

 

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Foreign Assets ” means any of the Fund’s securities or other investments (including foreign currencies) for which the primary market is outside the United States, and any cash and cash equivalents that are reasonably necessary to effect transactions of the Fund in those investments.

Foreign Custody Manager ” has the meaning set forth in section (a)(3) of Rule 17f-5.

Foreign Securities System ” means an Eligible Securities Depository listed on Schedule B.

Rule 17f-5 ” means Rule 17f-5 promulgated under the 1940 Act.

Rule 17f-7 ” means Rule 17f-7 promulgated under the 1940 Act.

Section 4.2. The Custod ian as Foreign Custody Manager.

4.2.1 Delegation.   The Fund, by resolution adopted by its Board, hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 4.2 with respect to Foreign Assets of the Fund held outside the United States.  The Custodian hereby accepts such delegation.  By giving at least 30 days’ prior written notice to the Fund, the Foreign Custody Manager may withdraw its acceptance of the delegated responsibilities generally or with respect to a Covered Foreign Country designated in the notice.  Following the withdrawal, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund generally or, as the case may be, with respect to the Covered Foreign Country so designated.

4.2.2 Exercise of Care as Foreign Custody Manager .  The Foreign Custody Manager shall exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Foreign Assets would exercise in performing the delegated responsibilities.

4.2.3 Foreign Custody Arrangements .  The Foreign Custody Manager shall be responsible for performing the delegated responsibilities only with respect to Covered Foreign Countries.  The Foreign Custody Manager shall list on Schedule A for a Covered Foreign Country each Eligible Foreign Custodian selected by the Foreign Custody Manager to maintain the Foreign Assets of the Fund with respect to the Covered Foreign Country. The list of Eligible Foreign Custodians may be amended from time to time upon notice in the sole discretion of the Foreign Custody Manager.  This Agreement constitutes a Proper Instruction by the Fund to open an account, and to place and maintain Foreign Assets, for the Fund in each applicable Covered Foreign Country.  The Fund shall satisfy the account opening requirements for the Covered Foreign Country, and the delegation for the Covered Foreign Country will not be considered to have been accepted by the Custodian until that satisfaction.  If the Foreign Custody Manager receives from the Fund Proper Instructions directing the Foreign Custody Manager to close the account, the delegation shall be considered withdrawn, and the Custodian shall immediately cease to be the Foreign Custody Manager with respect to the Fund for the Covered Foreign Country.

4.2.4   Scope of Delegated Responsibilities :  Subject to the provisions of this Section 4.2, the Foreign Custody Manager may place and maintain Foreign Assets in the care of an Eligible Foreign Custodian selected by the Foreign Custody Manager in each applicable Covered Foreign Country.  The Foreign Custody Manager shall determine that (a) the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by the Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1) and (b) the contract between the Foreign Custody Manager and the Eligible Foreign Custodian governing the foreign custody arrangements will satisfy the requirements of Rule 17f-5(c)(2).  The Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with the Eligible Foreign Custodian and (ii) the performance of the contract governing the custody arrangements.  If the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian are no longer appropriate, the Foreign Custody Manager shall so notify the Fund.

4.2.5 Reporting Requirements .  The Foreign Custody Manager shall (a) report the withdrawal of Foreign Assets from an Eligible Foreign Custodian and the placement of Foreign Assets with another Eligible Foreign Custodian by providing to the Fund’s Board an amended Schedule A at the end of the calendar quarter in which

 

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the action has occurred, and (b) after the occurrence of any other material change in the foreign custody arrangements of the Fund described in this Section 4.2, make a written report to the Board containing a notification of the change.

4.2.6 Representations .  The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as defined in Section (a)(7) of Rule 17f-5.  The Fund represents to the Custodian that its Board has (a) determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Fund, and (b) considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets of the Fund in each Covered Foreign Country.

4.2.7 Termination By the Fund of the Custodian as Foreign Custody Manager .  By giving at least 30 days’ prior written notice to the Custodian, the Fund may terminate the delegation to the Custodian as the Foreign Custody Manager for the Fund.  Following the termination, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund.

Section 4.3 Monitoring of Eligible Securities Depositories .  The Custodian shall (a) provide the Fund or its Investment Advisor with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B in accordance with Section (a)(1)(i)(A) of Rule 17f-7 and (b) monitor such risks on a continuing basis and  promptly notify the Fund or its Investment Advisor of any material change in such risks, in accordance with Section (a)(1)(i)(B) of Rule 17f-7.

Section 5.

Activities of the Custodian with Respect to Property Held Outside the United States .

Section 5.1 . Holding Securities .  Foreign securities and other financial assets held outside of the United States shall be maintained in a Foreign Securities System in a Covered Foreign Country through arrangements implemented by the Custodian or an Eligible Foreign Custodian, as applicable, in the Covered Foreign Country.  The Custodian shall identify on its books as belonging to the Fund the foreign securities and other financial assets held by each Eligible Foreign Custodian or Foreign Securities System.  The Custodian may hold foreign securities and other financial assets for all of its customers, including the Fund, with any Eligible Foreign Custodian in an account that is identified as the Custodian’s account for the benefit of its customers; provided however, that (a) the records of the Custodian with respect to foreign securities or other financial assets of the Fund maintained in the account shall identify those securities and  other financial assets as belonging to the Fund and (b) to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities and other financial assets so held by the Eligible Foreign Custodian be held separately from any assets of the Eligible Foreign Custodian or of other customers of the Eligible Foreign Custodian.

Section 5.2. Registration of Foreign Securities .   Foreign securities and other financial assets held outside of the United States maintained in the custody of an Eligible Foreign Custodian and that are not bearer securities shall be registered in the name of the Fund or in the name of the Custodian or in the name of any Eligible Foreign Custodian or in the name of any nominee of any of  the foregoing.  The Fund agrees to hold any such nominee harmless from any liability as a holder of record of the foreign securities or other financial assets.  The Custodian or an Eligible Foreign Custodian reserves the right not to accept securities or other financial assets on behalf of the Fund under the terms of this Agreement unless the form of the securities or other financial assets and the manner in which they are delivered are in accordance with local market practice.

Section 5.3. Indemnification by Eligible Foreign Custodians .   Each contract pursuant to which the Custodian employs an Eligible Foreign Custodian shall, to the extent possible, require the Eligible Foreign Custodian to indemnify and hold harmless the Custodian from and against any loss, cost or expense arising out of or in connection with the Eligible Foreign Custodian’s performance of its obligations.  At the Fund’s election, the Fund shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against an Eligible Foreign Custodian as a consequence of any such loss, cost or expense if and to the extent that the Fund has not been made whole for the loss, cost or expense.  In no event shall the Custodian be obligated to bring suit in its own name or to allow suit to be brought in its name.

 

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Section 5.4 Bank Accounts .

5.4.1 General .  The Custodian shall identify on its books as for the account of the Fund the amount of cash (including cash denominated in foreign currencies) deposited with the Custodian.  The Custodian shall maintain cash deposits in on book currencies on its balance sheet. The Custodian shall be liable for such balances.  If the Custodian is unable to maintain, or market practice does not facilitate the maintenance for the Fund of a cash balance in a currency as an on book currency, a deposit account shall be opened and maintained by the Custodian outside the United States on behalf of the Fund with an Eligible Foreign Custodian.  The Custodian shall not maintain the cash deposit on its balance sheet.  The Eligible Foreign Custodian will be liable for such balance directly to the Fund.  All deposit accounts referred to in this Section shall be subject only to draft or order by the Custodian or, if applicable, the Eligible Foreign Custodian acting pursuant to the terms of this Agreement.  Cash maintained in a deposit account and denominated in an “on book” currency will be maintained under and subject to the laws of the Commonwealth of Massachusetts.  The Custodian will not have any deposit liability for deposits in any currency that is not an “on book” currency.

5.4.2 Non-U.S. Branch and Non-U.S. Dollar Deposits .  In accordance with the laws of the Commonwealth of Massachusetts, the Custodian shall not be required to repay any deposit made at a non-U.S. branch of the Custodian or any deposit made with the Custodian and denominated in a non-U.S. dollar currency, if repayment of the deposit or the use of assets denominated in the non-U.S. dollar currency is prevented, prohibited or otherwise blocked due to (a) an act of war, insurrection or civil strife; (b) any action by a non-U.S. government or instrumentality or authority asserting governmental, military or police power of any kind, whether such authority be recognized as a de facto or a de jure government, or by any entity, political or revolutionary movement or otherwise that usurps, supervenes or otherwise materially impairs the normal operation of civil authority; or  (c) the closure of a non-U.S. branch in order to prevent, in the reasonable judgment of the Custodian, harm to the employees or property of the Custodian.

Section 5.5 . Collection of Income .  The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Fund shall be entitled.  If extraordinary measures are required to collect the income or payment, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures.  The Custodian shall credit income to the Fund as such income is received or in accordance with the Custodian’s then current payable date income schedule.  Any credit to the Fund in advance of receipt may be reversed when the Custodian determines that payment will not occur in due course, and the Fund may be charged at the Custodian’s applicable rate for time credited.  Income on securities or other financial assets loaned other than from the Custodian’s securities lending program shall be credited as received.

Section 5.6. Transactions in Foreign Custody Account .

5.6.1 Delivery Out .  The Custodian or an Eligible Foreign Custodian shall release and deliver foreign securities or other financial assets held outside of the United States owned by the Fund and held by the Custodian or such Eligible Foreign Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, specifying the foreign securities to be delivered and the person or persons to whom delivery is to be made. The Custodian shall pay out, or direct the respective Eligible Foreign Custodian or the respective Foreign Securities System to pay out, cash of the Fund only upon receipt of Proper Instructions specifying the amount of the payment and the person or persons to payment is to be made.

5.6.2 Market Conditions .  Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Fund and delivery of Foreign Assets maintained for the account of the Fund may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for the Foreign Assets from such purchaser or dealer.

5.6.3 Settlement Practices .  The Custodian shall provide to the Board the information with respect to custody and settlement practices in countries in which the Custodian employs an Eligible Foreign Custodian described on Schedule C at the time or times set forth on the Schedule.  The Custodian may revise Schedule C from time to time, but no revision shall result in the Board being provided with substantively less information than had been previously provided on Schedule C.

 

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Section 5.7 Shareholder or Bondholder Rights .  The Custodian shall use reasonable commercial efforts to facilitate the exercise of voting and other shareholder and bondholder rights with respect to foreign securities and other financial assets held outside the United States, subject always to the laws, regulations and practical constraints that may exist in the country where the securities or other financial assets are issued.  The Custodian may utilize Broadridge Financial Solutions, Inc. or another proxy service firm of recognized standing as its delegate to provide proxy services for the exercise of shareholder and bondholder rights.  Local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder and bondholder rights.

Section 5.8 . Communications .  The Custodian shall transmit promptly to the Fund written information with respect to materials received by the Custodian through Eligible Foreign Custodians from issuers of the foreign securities and other financial asset assets being held outside the United States for the account of the Fund.  The Custodian shall transmit promptly to the Fund written information with respect to materials so received by the Custodian from issuers of foreign securities whose tender or exchange is sought or from the party or its agent making the tender or exchange offer.  The Custodian shall also transmit promptly to the Fund all written information received by the Custodian through  Eligible Foreign Custodians from issuers of the foreign securities or other financial assets issued outside of the United States and being held for the account of the Fund regarding any class action or other collective litigation relating to the Fund’s foreign securities or other financial assets issued outside the United States and then held, or previously held, during the relevant class-action period during the term of this Agreement by the Custodian via an Eligible Foreign Custodian for the account of the Fund, including, but not limited to, opt-out notices and proof-of-claim forms. The Custodian does not support class-action participation by the Fund beyond such forwarding of written information received by the Custodian.

Section 6 . Foreign Exchange .

Section 6.1. Generally .  Upon receipt of Proper Instructions, which for purposes of this section may also include security trade advices, the Custodian shall facilitate the processing and settlement of foreign exchange transactions.  Such foreign exchange transactions do not constitute part of the services provided by the Custodian under this Agreement.

Section 6.2. Fund Elections .  The Fund (or its Investment Advisor acting on its behalf) may elect to enter into and execute foreign exchange transactions with third parties that are not affiliated with the Custodian, with State Street Global Markets, which is the foreign exchange division of State Street Bank and Trust Company and its affiliated companies (“ SSGM ”), or with a sub-custodian.  Where the Fund or its Investment Advisor gives Proper Instructions for the execution of a foreign exchange transaction using an indirect foreign exchange service described in the Client Publications, the Fund (or its Investment Advisor) instructs the Custodian, on behalf of the Fund, to direct the execution of such foreign exchange transaction to SSGM or, when the relevant currency is not traded by SSGM, to the applicable sub-custodian.  The Custodian shall not have any agency (except as contemplated in preceding sentence), trust or fiduciary obligation to the Fund, its Investment Advisor or any other person in connection with the execution of any foreign exchange transaction.  The Custodian shall have no responsibility under this Agreement for the selection of the counterparty to, or the method of execution of, any foreign exchange transaction entered into by the Fund (or its Investment Advisor acting on its behalf) or the reasonableness of the execution rate on any such transaction.

Section 6.3. Fund Acknowledgement.   The Fund acknowledges that in connection with all foreign exchange transactions entered into by the Fund (or its Investment Advisor acting on its behalf) with SSGM or any sub-custodian, SSGM and each such sub-custodian:

(i)

shall be acting in a principal capacity and not as broker, agent or fiduciary to the Fund or its Investment Advisor;

(ii)

shall seek to profit from such foreign exchange transactions, and are entitled to retain and not disclose any such profit to the Fund or its Investment Advisor; and

(iii)

shall enter into such foreign exchange transactions pursuant to the terms and conditions, including pricing or pricing methodology, (a) agreed with the Fund or its Investment Advisor from time to time or (b) in the case of an indirect foreign exchange service, (i) as established by SSGM and set forth in the Client Publications with respect to the particular foreign exchange execution services selected by the Fund or the Investment Advisor or (ii) as established by the sub-custodian from time to time.

 

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Section 6.4. Transactions by State Street .  The Custodian or its affiliates, including SSGM, may trade based upon information that is not available to the Fund (or its Investment Advisor acting on its behalf), and may enter into transactions for its own account or the account of clients in the same or opposite direction to the transactions entered into with the Fund (or its Investment Manager), and shall have no obligation, under this Agreement, to share such information with or consider the interests of their respective counterparties, including, where applicable, the Fund or the Investment Advisor.

Section 7. Contractual Settlement Services (Purchase/Sales) .

Section 7.1 General .  The Custodian shall, in accordance with the terms set out in this Section 7, debit or credit the appropriate deposit account of the Fund on a contractual settlement basis in connection with the purchase of securities or other financial assets for the Fund or the receipt of the proceeds of the sale or redemption of securities or other financial assets.

Section 7.2 Provision of Services .  The services described in Section 7.1 (the “ Contractual Settlement Services ”) shall be provided for the securities and other financial assets and in such markets as the Custodian may advise from time to time. The Custodian may terminate or suspend any part of the provision of the Contractual Settlement Services at its sole discretion immediately upon notice to the Fund, including, without limitation, in the event of force majeure events affecting settlement, any disorder in markets, or other changed external business circumstances affecting the markets or the Fund.

Section 7.3 Purchase Consideration .  The consideration payable in connection with a purchase transaction shall be debited from the appropriate deposit account of the Fund as of the time and date that funds would ordinarily be required to settle the transaction in the applicable market.  The Custodian shall promptly recredit the amount at the time that the Fund notifies the Custodian by Proper Instruction that the transaction has been canceled.

Section 7.4 Sales and Redemptions .  A provisional credit of an amount equal to the net sale price for a sale or redemption of securities or other financial assets shall be made to the account of the Fund as if the amount had been received as of the close of business on the date on which good funds would ordinarily be immediately available in the applicable market.  The provisional credit will be made conditional upon the Custodian having received Proper Instructions with respect to, or reasonable notice of, the transaction, as applicable; and the Custodian or its agent having possession of the securities of other financial assets (excluding financial assets subject to any third party lending arrangement entered into by the Fund) associated with the transaction in good deliverable form and not being aware of any facts which would lead the Custodian or its agent to believe that the transaction will not settle in the time period ordinarily applicable to such transactions in the applicable market.

Section 7.5. Reversals of Provisional Credits or Debits .  The Custodian shall have the right to reverse any provisional credit or debit given in connection with the Contractual Settlement Services at any time when the Custodian believes, in its reasonable judgment, that such transaction will not settle in accordance with its terms or amounts due pursuant thereto, will not be collectable or where the Custodian has not been provided Proper Instructions with respect thereto, as applicable.  The Fund shall be responsible for any costs or liabilities resulting from such reversal.  Upon such reversal, a sum equal to the credited or debited amount shall become immediately payable by the Fund to the Custodian and may be debited from any deposit or other account held for benefit of the Fund.

Section 8. Tax Services .

Section 8.1 General .  Subject to and to the extent of receipt by the Custodian of relevant and necessary documentation and information with respect to the Fund that the Custodian has requested, the Custodian shall perform the following services: (a) file claims for exemptions, reductions in withholding taxes, or refunds of any tax with respect to withheld foreign (non-U.S.) taxes in instances in which such claims are appropriate; (b) withhold appropriate amounts as required by U.S. tax laws with respect to amounts received on behalf of nonresident aliens; and (c) provide to the Fund such information actually received by the Custodian that could, in the Custodian’s reasonable belief and sole discretion, assist any of the Fund in their submission of any reports or returns with respect to taxes.  It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund or the Custodian as custodian by the tax law of countries, states and political subdivisions thereof, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting.  The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with

 

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respect to any claim for exemption or refund under the tax law of countries for which the Fund has provided sufficient information and documentation.

Section 8.2 Ownership Certificates for Tax Purposes .  The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities or other financial assets held within the United States of the Fund held by the Custodian and in connection with transfers of securities and other financial assets.

Section 8.3 Authorizations .  The Custodian is authorized to deduct from any cash received or credited to the account of the Fund any taxes or levies required by any tax or other governmental authority having jurisdiction in respect of the Fund’s transactions and to disclose any information required by any such tax or other governmental authority in relation to processing any claim for exemption from or reduction or refund of any taxes relating to the Fund transactions and holdings.

Section 8.4 Services Further Limited .  Other than the servicing responsibilities provided herein, the Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund or the Custodian as custodian of the assets of the Fund by the tax law of any country or of any state or political subdivision thereof.  The Custodian shall not be considered the Fund’s tax advisor or tax counsel.

Section 9. Payments for Sales or Redemptions of Fund Interests .

Section 9.1 Payment for Fund Interests Issued .  The Custodian shall receive from the distributor of Fund Interests of the Fund or from the Fund’s transfer agent (the “ Transfer Agent ”) and deposit into the account of the Fund such payments as are received for Fund Interests issued or sold from time to time by the Fund.  The Custodian will provide timely notification to the Fund and the Transfer Agent of any receipt of the payments by the Custodian.

Section 9.2 Payment for Fund Interests Redeemed .  Upon receipt of instructions from the Transfer Agent, the Custodian shall set aside funds of the Fund to the extent available for payment to holders of Fund Interests who have delivered to the Transfer Agent a request for redemption of their Fund Interests. The Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming interest holders.  If the Custodian furnishes a check to a holder in payment for the redemption of the holder’s Fund Interests and the check is drawn on the Custodian, the Custodian shall honor the check so long as the check is presented to the Custodian in accordance with the Deposit Account Agreement and such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian.

Section 10. Proper Instructions .

Section 10. 1 Form and Security Procedures .  Proper Instructions may be in writing signed by the authorized individual or individuals or may be in a tested communication or in a communication utilizing access codes effected between electro-mechanical or electronic devices or may be by such other means and utilizing such intermediary systems and utilities as may be agreed to from time to time by the Custodian and the individual or organization giving the instruction, provided that the Fund has followed any security procedures agreed to from time to time by the Fund and the Custodian including, but not limited to, the security procedures selected by the Fund by reference to the form of Funds Transfer Addendum hereto, the terms of which are part of this Agreement.  The Custodian may agree to accept oral instructions, and in such case oral instructions will be considered Proper Instructions.  The Fund shall cause all oral instructions to be confirmed in writing, but the Fund’s failure to do so shall not affect the Custodian’s authority to rely on the oral instructions.

Section 10.2 Reliance on Officer’s Certificate .  Concurrently with the execution of this Agreement, and from time to time thereafter, as appropriate, the Fund shall deliver to the Custodian an officer’s certificate setting forth the names, titles, signatures and scope of authority of all individuals authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund.  The certificate may be accepted and conclusively relied upon by the Custodian and shall be considered to be in full force and effect until receipt by the Custodian of a similar certificate to the contrary and the Custodian has had a reasonable time to act thereon.

 

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Section 10.3 Untimely Proper Instructions .  If the Custodian is not provided with reasonable time to execute a Proper Instruction (including any Proper Instruction not to execute, or any other modification to, a prior Proper Instruction),  the Custodian will use good faith efforts to execute the Proper Instruction but will not be responsible or liable if the Custodian’s efforts are not successful (including any inability to change any actions that the Custodian had taken pursuant to the prior Proper Instruction).  The inclusion of a statement of purpose or intent (or any similar notation) in a Proper Instruction shall not impose any additional obligations on the Custodian or condition or qualify its authority to effect the Proper Instruction.  The Custodian will not assume a duty to ensure that the stated purpose or intent is fulfilled and will have no responsibility or liability when it follows the Proper Instruction without regard to such purpose or intent.

Section 11. Actions Permitted without Express Authority .

The Custodian may in its discretion, without express authority from the Fund on behalf of the Fund:

 

1)

Make payments to itself or others for minor expenses of handling securities or other financial assets relating to its duties under this Agreement; provided that all such payments shall be accounted for to the Fund;

 

2)

Surrender securities or other financial assets in temporary form for securities or other financial assets in definitive form;

 

3)

Endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and

 

4)

In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and other financial assets of the Fund except as otherwise directed by the applicable Board.

Section 12. Records .

The Custodian shall with respect to the Fund create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of the Fund under the 1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.  All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the SEC.  The Custodian shall, at the Fund’s request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.  In the event that the Custodian is requested or authorized by the Fund, or required by subpoena, administrative order, court order or other legal process, applicable law or regulation, or required in connection with any investigation, examination or inspection of the Fund by state or federal regulatory agencies, to produce the records of the Fund or the Custodian’s personnel as witnesses, the Fund agrees to pay the Custodian for the Custodian’s time and expenses, as well as the fees and expenses of the Custodian’s counsel, incurred in responding to such request, order or requirement.

Section 13. Fund’s Independent Accountants .

Section 13.1 Opinions .  The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund’s independent accountants with respect to its activities hereunder in connection with the preparation of the Fund’s Form N-1A or Form N-2, as applicable, and Form N-SAR or other annual reports to the SEC and with respect to any other requirements thereof.

Section 13.2 Reports .  Upon reasonable request of a Fund, the Custodian shall provide the Fund with a copy of the Custodian’s Service Organizational Control (SOC) 1 reports prepared in accordance with the requirements of AT section 801, Reporting on Controls at a Service Organization (formerly Statement on Standards for Attestation Engagements (SSAE) No. 16).  The Custodian shall use commercially reasonable efforts to provide the Fund with such reports as the Fund may reasonably request or otherwise reasonably require to fulfill its duties under Rule 38a-1 of the 1940 Act or similar legal and regulatory requirements.

 

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Section 14. Custodian’s Standard of Care; Exculpation .

14.1 Standard of Care .  In carrying out the provisions of this Agreement, the Custodian shall act in good faith and without negligence and shall be held to the exercise of reasonable care.

14.2 Reliance on Proper Instructions .  The Custodian shall be entitled conclusively to rely and act upon Proper Instructions until the Custodian has received notice of any change from the Fund and has had a reasonable time to act thereon.  The Custodian may act on a Proper Instruction if it reasonably believes that it contains sufficient information and may refrain from acting on any Proper Instructions until such time that it has determined, in its sole discretion, that is has received any required clarification or authentication of Proper Instructions.  The Custodian may rely upon and shall be protected in acting upon any Proper Instruction or any other instruction, notice, request, consent, certificate or other instrument or paper believed by it in good faith to be genuine and to have been properly executed by or on behalf of the Fund.

14.3 Other Reliance .  The Custodian is authorized and instructed to rely upon the information that the Custodian receives from the Fund or any third party on behalf of the Fund.  The Custodian shall have no responsibility to review, confirm or otherwise assume any duty with respect to the accuracy or completeness of any information supplied to it by or on behalf of the Fund.  The Custodian shall have no liability in respect of any loss, cost or expense incurred or sustained by the Fund arising from the performance of the Custodian’s duties hereunder in reliance upon records that were maintained for the Fund by any individual or organization, other than the Custodian, prior to the Custodian’s appointment as custodian hereunder.  The Custodian shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters and shall be without liability for any action reasonably taken or omitted pursuant to the advice.

14.4 Liability for Foreign Custodians .  The Custodian shall be liable for the acts or omissions of an Eligible Foreign Custodian to the same extent as if the action or omission were performed by the Custodian itself, taking into account the facts and circumstances and the established local market practices and laws prevailing in the particular jurisdiction in which the Fund elects to invest.

14.5 Insolvency and Country Risk .  The Custodian shall in no event be liable for (a) the insolvency of any Eligible Foreign Custodian, (b) the insolvency of any depositary bank maintaining in a deposit account cash denominated in any currency other than an “on book” currency, or (c) any loss, cost or expense incurred or sustained by the Fund resulting from or caused by Country Risk.

14.6 Force Majeure and Third Party Actions .  The Custodian shall be without responsibility or liability to the Fund for: (a) events or circumstances beyond the reasonable control of the Custodian, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any currency or securities market or system, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, work stoppages, natural disasters, acts of war, revolution, riots or terrorism or other similar force majeure events or acts; (b) errors by the Fund, its Investment Advisor or any other duly authorized person in their instructions to the Custodian; (c) the insolvency of or acts or omissions by a U.S. Securities System, Foreign Securities System, Underlying Transfer Agent or domestic sub-custodian designated pursuant to Section 2.2; (d) the failure of the Fund, its Investment Advisor, or any duly authorized individual or organization to adhere to the Custodian’s operational policies and procedures; (e) any delay or failure of any broker, agent, securities intermediary or other intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodian’s sub-custodian or agent securities or other financial assets purchased or in the remittance or payment made in connection with securities or other financial assets sold; (f) any delay or failure of any organization in charge of registering or transferring securities or other financial assets in the name of the Custodian, the Fund, the Custodian’s sub-custodians, nominees or agents including non-receipt of bonus, dividends and rights and other accretions or benefits; (g) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security, other financial asset, U.S. Securities System or Foreign Securities System; and (h) the effect of any provision of any law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction.

14.7 Indirect/Special/Consequential Damages .  Notwithstanding any other provision set forth herein, in no event shall the Custodian be liable for any special, indirect, incidental, punitive or consequential damages of

 

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any kind whatsoever (including, without limitation, lost profits) with respect to the services provided pursuant to this Agreement, regardless of whether either party has been advised of the possibility of such damages.

14.8 Delivery of Property . The Custodian shall not be responsible for any securities or other assets of the Fund which are not received by the Custodian or which are delivered out in accordance with Proper Instructions.  The Custodian shall not be responsible for the title, validity or genuineness of any securities or other assets or evidence of title thereto received by it or delivered by it pursuant to this Agreement.

14.9 No Investment Advice .  The Custodian has no responsibility to monitor or oversee the investment activity undertaken by the Fund or its Investment Advisor.  The Custodian has no duty to ensure or to inquire whether an Investment Advisor complies with any investment objectives or restrictions agreed upon between the Fund and the Investment Advisor or whether the Investment Advisor complies with its legal obligations under applicable securities laws or other laws, including laws intended to protect the interests of investors.  The Custodian shall neither assess nor take any responsibility or liability for the suitability or appropriateness of the investments made by the Fund.

14.10 Communications .  The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with securities or other financial assets of the Fund at any time held by the Custodian unless (a) the Custodian or the Eligible Foreign Custodian is in actual possession of such foreign securities or other financial assets, (b) the Custodian receives Proper Instructions with regard to the exercise of the right or power, and (c) both of the conditions referred to in the foregoing clauses (a) and (b) have been satisfied at least three business days prior to the date on which the Custodian is to take action to exercise the right or power.

14.11 Loaned Securities .  Income due to the Fund on securities or other financial assets loaned shall be the responsibility of the Fund.  The Custodian will have no duty or responsibility in connection with loaned securities or other financial assets, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is entitled.

14.12 Trade Counterparties .  The Fund’s receipt of securities or other financial assets from a counterparty in connection with any of its purchase transactions and its receipt of cash from a counterparty in connection with any sale or  redemption of securities or other financial assets will be at the Fund’s sole risk, and the Custodian shall not be obligated to make demands on the Fund’s behalf if the Fund’s counterparty defaults.  If the Fund’s counterparty fails to deliver securities, other financial assets or cash, the Custodian will, as its sole responsibility, notify the Fund’s Investment Advisor of the failure within a reasonable time after the Custodian became aware of the failure.

Section 15. Compensation and Indemnification of Custodian; Security Interest .

Section. 15.1 Compensation .  The Custodian shall be entitled to reasonable compensation for its services and expenses as agreed upon from time to time between the Fund and the Custodian.

Section 15.2 Indemnification .  The Fund agrees to indemnify the Custodian and to hold the Custodian harmless from and against any loss, cost or expense sustained or incurred by the Custodian in acting or omitting to act under or in respect of this Agreement in good faith and without negligence, including, without limitation, (a) the Custodian’s compliance with Proper Instructions and (b) in connection with the provision of services to the Fund pursuant to Section 8, any obligations, including taxes, withholding and reporting requirements, claims for exemption and refund, additions for late payment, interest, penalties and other expenses, that may be assessed against the Fund or the Custodian as custodian of the assets of the Fund.  If the Fund instructs the Custodian to take any action with respect to securities or other financial assets, and the action involves the payment of money or may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable therefor, the Fund, as a prerequisite to the Custodian taking the action, shall provide to the Custodian at the Custodian’s request such further indemnification in an amount and form satisfactory to the Custodian.

Section 15.3 Security Interest .  The Fund hereby grants to the Custodian, to secure the payment and performance of the Fund’s obligations under this Agreement, whether contingent or otherwise, a security interest in and right of recoupment and setoff against all cash and all securities and other financial assets at any time held for the account of the Fund by or through the Custodian.  The obligations include, without limitation, the Fund’s obligations to reimburse the Custodian if the Custodian or any of its affiliates, subsidiaries or agents advances cash or securities or

 

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other financial assets to the Fund for any purpose (including but not limited to settlements of securities or other financial assets, foreign exchange contracts and assumed settlement), or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominee’s own negligence, as well as the Fund’s obligation to compensate the Custodian pursuant to Section 15.1 or indemnify the Custodian pursuant to Section 15.2.  Should the Fund fail to reimburse or otherwise pay the Custodian any obligation under this Agreement promptly, the Custodian shall have the rights and remedies of a secured party under this Agreement, the UCC and other applicable law, including the right to utilize available cash and to sell or otherwise dispose of the Fund’s assets to the extent necessary to obtain payment or reimbursement.  The Custodian may at any time decline to follow Proper Instructions to deliver out cash, securities or other financial assets if the Custodian determines in its reasonable discretion that, after giving effect to the Proper Instructions, the cash, securities or other financial assets remaining will not have sufficient value fully to secure the Fund's payment or reimbursement obligations, whether contingent or otherwise.

Section 16. Effective Period and Termination .

Section 16.1 Term .  This Agreement shall remain in full force and effect for an initial term ending October 25, 2019 (the “Initial Term”).  After the expiration of the Initial Term, this Agreement shall automatically renew for successive one-year terms (each, a “Renewal Term”) unless a written notice of non-renewal is delivered by the non-renewing party no later than ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, as the case may be.

Section 16.2 Termination .  During the Initial Term and thereafter, either party may terminate this Agreement: (i) in the event of the other party’s material breach of a material provision of this Agreement that the other party has either (a) failed to cure or (b) failed to establish a remedial plan to cure that is reasonably acceptable, in each case, within 60 days’ written notice of such breach, or (ii) upon 180 days’ written notice to the other party, or (iii) in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the other party at the direction of an appropriate agency or court of competent jurisdiction.

Section 16.3 Payments Owing to the Custodian .  Upon termination of this Agreement pursuant to Section 16.1 or 16.2  the Fund shall pay to the Custodian any compensation then due and shall reimburse the Custodian for its other fees, expenses and charges.  In the event of: (a) the Fund's termination of this Agreement for any reason other than as set forth in Section 16.1 or 16.2, or (b) a transaction not in the ordinary course of business pursuant to which the Custodian is not retained to continue providing services hereunder to the Fund (or its respective successor), the Fund shall pay to the Custodian any compensation due through the effective date of termination and shall reimburse the Custodian for its other fees, expenses and charges incurred prior to such date.  Upon receipt of such payment and reimbursement, the Custodian will deliver the Fund’s cash and its securities and other financial assets as set forth in Section 17.

Section 16.4 Exclusions .  No payment will be required pursuant to clause (b) of Section 16.3 in the event of any transaction consisting of (a) the liquidation or dissolution of the Fund and distribution of the Fund’s assets as a result of the Board’s determination in its reasonable business judgment that the Fund is no longer viable, (b) a merger of the Fund into, or the consolidation of the Fund with, another organization or series, or (c) the sale by the Fund of all or substantially all of its assets to another organization or series and, in the case of a transaction referred to in the foregoing clause (b) or (c)  the Custodian is retained to continue providing services to the Fund (or its respective successor) on substantially the same terms as this Agreement.

Section 16.5 Effect of Termination .  Following termination, the Custodian shall have no further responsibility to forward information under Section 3.8 or 5.8.  The provisions of Sections 8, 14, 15 and 17 of this Agreement shall survive termination of this Agreement.

Section 17. Successor Custodian .

Section 17.1 Successor Appointed .  If a successor custodian shall be appointed for the Fund by its Board, the Custodian shall, upon termination of this Agreement and receipt of Proper Instructions, deliver to the successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all cash and all securities and other financial assets of the Fund then held by the Custodian hereunder and shall transfer to an account of the

 

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successor custodian all of the securities and other financial assets of the Fund held in a U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent.

Section 17.2 No Successor Appointed .  If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of Proper Instructions, deliver at the office of the Custodian and transfer the cash and the securities and other financial assets of the Fund in accordance with the Proper Instructions.

Section 17.3 No Successor Appointed and No Property Instructions .  If no successor custodian has been appointed and no Proper Instructions have been delivered to the Custodian on or before the termination of this Agreement, then the Custodian shall have the right to deliver to a bank or trust company, which is a “bank” as defined in the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of its own selection, all cash and all securities and other financial assets of the Fund then held by the Custodian hereunder, and to transfer to an account of the bank or trust company all of the securities and other financial assets of the Fund held in any U.S. Securities System or Foreign Securities System or at the Underlying Transfer Agent.  The transfer will be on such terms as are contained in this Agreement or as the Custodian may otherwise reasonably negotiate with the bank or trust company.  Any compensation payable to the bank or trust company, and any cost or expense incurred by the Custodian, in connection with the transfer shall be for the account of the Fund.

Section 17.4 Remaining Property .  If any cash or any securities or other financial assets of the Fund held by the Custodian hereunder remain held by the Custodian after the termination of this Agreement owing to the failure of the Fund to provide Proper Instructions, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian holds the cash or the securities or other financial assets (the existing agreed-to compensation at the time of termination shall be one indicator of what is considered fair compensation).  The provisions of this Agreement relating to the duties, exculpation and indemnification of the Custodian shall apply in favor of the Custodian during such period.

Section 17.5 Reserves .  Notwithstanding the foregoing provisions of this Section 17, the Custodian may retain cash or securities or other financial assets of the Fund as a reserve reasonably established by the Custodian to secure the payment or performance of any obligations of the Fund secured by a security interest or right of recoupment or setoff in favor of the Custodian.

Section 18. Remote Access Services Addendum .  The Custodian and the Fund agree to be bound by the terms of the Remote Access Services Addendum hereto.

Section 19. Loan Services Addendum .  If the Fund directs the Custodian in writing to perform loan services, the Custodian and the Fund will be bound by the terms of the Loan Services Addendum attached hereto.  The Fund shall reimburse Custodian for its fees and expenses related thereto as agreed upon from time to time in writing by the Fund and the Custodian.

Section 20. General .

Section 20.1   Governing Law .  Any and all matters in dispute between the parties hereto, whether arising from or relating to this Agreement, shall be governed by and construed in accordance with laws of the Commonwealth of Massachusetts, without giving effect to any conflict of laws rules.  Likewise, the law applicable to all issues in Article 2(1) of the Hague Convention on the Law Applicable to Certain Rights in respect of Securities Held with an Intermediary is the law in force in the Commonwealth of Massachusetts.

Section 20.2   Prior Agreements; Amendments .  This Agreement supersedes all prior agreements between the Fund and the Custodian relating to the custody of the Fund’s assets.  This Agreement may be amended at any time in writing by mutual agreement of the parties hereto.

Section 20.3   Assignment .  This Agreement may not be assigned by (a) the Fund without the written consent of the Custodian or (b) the Custodian without the written consent of the Fund.  However, without the consent the Fund, the Custodian may assign this Agreement to a successor of all or a substantial portion of its business, or to a party controlling, controlled by or under common control with the Custodian.  Notwithstanding the foregoing, the Custodian may employ, engage, associate or contract with such person or persons, including, without limitation, affiliates

 

-15-


 

and subsidiaries of the Custodian, as the Custodian may deem desirable to assist it in performing certain of its non-custodial obligations under this Agreement without the consent of the Fund; provided, however, that the compensation of such person or persons shall be paid by the Custodian and that the Custodian shall be as fully responsible to the Fund for the acts and omissions of any such person or persons as it is for its own acts and omissions under this Agreement.

Section 20.4   Interpretive and Additional Provisions .  In connection with the operation of this Agreement, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement.  Any such interpretive or additional provisions shall be in a writing signed by all parties, provided that no such interpretive or additional provisions shall contravene any applicable laws or regulations or any provision of the Fund’s organic record and Prospectus.  No interpretive or additional provisions made as provided in the preceding sentence shall be an amendment of this Agreement.

Section 20.5   The Parties; Representations and Warranties .

20.5.1 Fund Representations and Warranties .  The Fund hereby represents and warrants that (a) it is duly organized and validly existing in good standing in its jurisdiction of organization; (b) it has the requisite power and authority under applicable law and its organic record to enter into and perform this Agreement; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Fund’s ability to perform its duties and obligations under this Agreement; and (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Fund or any law or regulation applicable to it.

20.5.2 Custodian Representations and Warranties .  The Custodian hereby represents and warrants that (a) it is a trust company, duly organized and validly existing under the laws of the Commonwealth of Massachusetts; (b) it has the requisite power and authority to carry on its business in the Commonwealth of Massachusetts; (c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (d) no legal or administrative proceedings have been instituted or threatened which would materially impair the Custodian’s ability to perform its duties and obligations under this Agreement; and (e) its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Custodian or any law or regulation applicable to it.

Section 20.6   Notices .  Any notice, instruction or other communication required to be given hereunder will, unless otherwise provided in this Agreement, be in writing and may be sent by hand, or by facsimile transmission, or overnight delivery by any recognized delivery service, to the parties at the following addresses or such other addresses as may be notified by any party from time to time.

 

To the Fund:

 

Great Elm Capital Corp.

 

 

c/o Great Elm Capital Management, Inc.

 

 

200 Clarendon St, 51st Floor

 

 

Boston, MA 02116

 

 

Attention:  General Counsel

 

 

Telephone: 617-375-3000

 

 

Telecopy: 617-247-7985

 

 

 

To the Custodian:

 

STATE STREET BANK AND TRUST COMPANY

 

 

100 Summer Street, Floor 5

 

 

Box 5501

 

 

Boston, MA 02206

 

 

Attention: James Meagher, Managing Director

 

 

State Street Alternative Investment Solutions

 

 

Telephone: 617-662-7310

 

 

Telecopy: 212-651-2393

 

 

 

with a copy to:

 

State Street Bank and Trust Company

 

 

Legal Division – Global Services Americas

 

 

P.O. Box 5049

 

-16-


 

 

 

Boston, MA  02206-5049

 

 

Attention:  Senior Vice President and Senior Managing Counsel

Section 20.7   Counterparts .  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts taken together shall constitute one and the same Agreement.  Counterparts may be executed in either original or electronically transmitted form (e.g., faxes or emailed portable document format (PDF) form), and the parties hereby adopt as original any signatures received in electronically transmitted form.

Section 20.8   Severability ; No Waiver.  If any provision of this Agreement shall be held to be invalid, unlawful or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.  The failure of a party hereto to insist upon strict adherence to any term of this Agreement on any occasion or the failure of a party hereto to exercise or any delay in exercising any right or remedy under this Agreement shall not constitute a waiver of any the  term, right or remedy or a waiver of any other rights or remedies, and no single or partial exercise of any right or remedy under this Agreement shall prevent any further exercise of the right or remedy or the exercise of any other right or remedy.

Section 20.9 Confidentiality .  All information provided under this Agreement by a party (the “Disclosing Party”) to the other party (the “Receiving Party”) regarding the Disclosing Party’s business and operations shall be treated as confidential.  Subject to Section 20.10 below, all confidential information provided under this Agreement by Disclosing Party shall be used, including disclosure to third parties, by the Receiving Party, or its agents or service providers, solely for the purpose of performing or receiving the services and discharging the Receiving Party’s other obligations under the Agreement or managing the business of the Receiving Party and its affiliates, including financial and operational management and reporting, risk management, legal and regulatory compliance and client service management.  The foregoing shall not be applicable to any information (a) that is publicly available when provided or thereafter becomes publicly available, other than through a breach of this Agreement, (b) that is independently derived by the Receiving Party without the use of any information provided by the Disclosing Party in connection with this Agreement, (c) that is disclosed to comply with any legal or regulatory proceeding, investigation, audit, examination, subpoena, civil investigative demand or other similar process, (d) that is disclosed as required by operation of law or regulation or as required to comply with the requirements of any market infrastructure that the Disclosing Party or its agents direct the Custodian or its affiliates to employ (or which is required in connection with the holding or settlement of instruments included in the assets subject to this Agreement), or (e) where the party seeking to disclose has received the prior written consent of the party providing the information, which consent shall not be unreasonably withheld.

Section 20.10   Use of Data .

(a) In connection with the provision of the services and the discharge of its other obligations under this Agreement, the Custodian (which term for purposes of this Section 20.10 includes each of its parent company, branches and affiliates (“ Affiliates ”)) may collect and store information regarding the Fund and share such information with its Affiliates, agents and service providers in order and to the extent reasonably necessary (i) to carry out the provision of services contemplated under this Agreement and other agreements between the Fund and the Custodian or any of its Affiliates and (ii) to carry out management of its businesses, including, but not limited to, financial and operational management and reporting, risk management, legal and regulatory compliance and client service management.

(b) Subject to paragraph (c) below, the Custodian and/or its Affiliates (except those Affiliates or business divisions principally engaged in the business of asset management) may use any data or other information (“ Data ”) obtained by such entities in the performance of their services under this Agreement or any other agreement between the Fund and the Custodian or one of its Affiliates, including Data regarding transactions and portfolio holdings relating to the Fund, and publish, sell, distribute or otherwise commercialize the Data; provided that, unless the Fund otherwise consents, Data is combined or aggregated with information relating to (i) other customers of the Custodian and/or its Affiliates or (ii) information derived from other sources, in each case such that any published information will be displayed in a manner designed to prevent attribution to or identification of such Data with the Fund.  The Fund agrees that Custodian and/or its Affiliates may seek to profit and realize economic benefit from the commercialization and use of the Data, that such benefit will constitute part of the Custodian’s compensation for services under this Agreement or such other agreement, and the Custodian and/or its Affiliates shall be entitled to retain and not be required to disclose the amount of such economic benefit and profit to the Fund.

 

-17-


 

(c) Except as expressly contemplated by this Agreement, nothing in this Section 20.10 shall limit the confidentiality and data-protection obligations of the Custodian and its Affiliates under this Agreement and applicable law.  The Custodian shall cause any Affiliate, agent or service provider to which it has disclosed Data pursuant to this Section 20.10 to comply at all times with confidentiality and data-protection obligations as if it were a party to this Agreement.

Section 20.11   Reproduction of Documents .  This Agreement and all schedules, addenda, exhibits, appendices, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process.  Any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

Section 20.12   Regulation GG .  The Fund  represents and warrants that it does not engage in an “Internet gambling business,” as such term is defined in Section 233.2(r) of Federal Reserve Regulation GG (12 CFR 233) and covenants that it shall not engage in an Internet gambling business.  In accordance with Regulation GG, the Fund is hereby notified that “restricted transactions,” as such term is defined in Section 233.2(y) of Regulation GG, are prohibited in any dealings with the Custodian pursuant to this Agreement or otherwise between or among any party hereto.

Section 20.13   Shareholder Communications Election .  SEC Rule 14b-2 requires banks that hold securities, as that term is used in federal securities laws, for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information.  In order to comply with the rule, as may be applicable, the Custodian needs the Fund to indicate whether it authorizes the Custodian to provide the Fund’s name, address, and share position to requesting companies whose securities the Fund owns.  If the Fund tells the Custodian “no,” the Custodian will not provide this information to requesting companies.  If the Fund tells the Custodian “yes” or does not check either “yes” or “no” below, the Custodian is required by the rule, as applicable, to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund.  For the Fund’s protection, the Rule, as applicable, prohibits the requesting company from using the Fund’s name and address for any purpose other than corporate communications.  Please indicate below whether the Fund consents or objects by checking one of the alternatives below.

YES [  ]

The Custodian is authorized to release the Fund’s name, address, and share positions.

NO  [X]

The Custodian is not authorized to release the Fund’s name, address, and share positions.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

-18-


 

Signature Page

In Witness Whereof , each of the parties has caused this Agreement to be executed in its name and behalf by its duly authorized representative under seal as of the date first above-written.

Great Elm Capital Corp.

 

By:

/s/ Peter Reed

 

Name: Peter Reed

 

Title: Chief Executive Officer

 

State Street Bank and Trust Company

 

By:

/s/ Joseph W Scott

Name:

Joseph W Scott

Title:

Insert

 

 

-19-

Exhibit 14.1

GREAT ELM CAPITAL CORP.

SOX

CODE OF BUSINESS

CONDUCT AND ETHICS

As Adopted: July 27, 2016 2016


SOX

CODE OF BUSINESS CONDUCT

AND ETHICS

TABLE OF CONTENTS

 

 

Page

Introduction

D-1

Purpose of the Code

D-1

Conflicts of Interest

D-2

Corporate Opportunities

D-2

Confidentiality

D-2

Fair Dealing

D-3

Protection and Proper Use of Company Assets

D-3

Compliance with Applicable Laws, Rules and Regulations

D-3

Equal Opportunity, Harassment

D-3

Accuracy of Company Records

D-4

Retaining Business Communications

D-4

Political Contributions

D-4

Media Relations

D-4

Intellectual Property Information

D-5

Internet and E-mail Policy

D-5

Reporting Violations and Complaint Handling

D-5

Administration of the Code

D-6

Sanctions for Code Violations

D-6

Application/Waivers

D-6

Revisions and Amendments

D-7

 

 

Appendices

 

 

 

Code Acknowledgment

D-8


SOX CODE OF BUSINESS CONDUCT AND ETHICS

Introduction

Section 406 of the Sarbanes-Oxley Act of 2002 (“ SOX ”) and Item 406 of Regulation S-K require that public companies disclose whether or not they have adopted a code of business conduct and ethics for senior financial officers and, if not, to explain why not, and the NASDAQ requires the same for all directors, officers and employees.  A code of business conduct and ethics for this purpose is defined as a document setting forth standards that are reasonably designed to deter wrongdoing and to promote, among other matters, honest and ethical conduct, full and accurate disclosures in SEC filings and other public communications, and compliance with applicable laws, rules and regulations.

Ethics are important to Great Elm Capital Corp. ( “GECC”, “our”, “us”, or “we” ) and to its management.  GECC is committed to the highest ethical standards and to conducting its business with the highest level of integrity.

All officers, directors, and employees of GECC and its investment adviser (collectively, the “Covered Persons,” and individually, “you” ) are responsible for maintaining this level of integrity and for complying with the policies contained in this Code.  If you have a question or concern about what is proper conduct for you or anyone else, please raise these concerns with any member of GECC’s management, or follow the procedures outlined in applicable sections of this Code.

Purpose of the Code

This Code is intended to:

 

help you recognize ethical issues and take the appropriate steps to resolve these issues;

 

deter ethical violations;

 

assist you in reporting any unethical or illegal conduct; and

 

reaffirm and promote our commitment to a corporate culture that values honesty and accountability.

All Covered Persons will acknowledge in writing that they have received a copy of this Code, read it, and understand that the Code contains our expectations regarding their conduct.


Conflicts of Interest

You must avoid any conflict, or the appearance of a conflict, between your personal interests and our interests.  A conflict exists when your personal interests in any way interfere – or even appear to interfere – with our interests, or when you take any action or have any interests that may make it difficult for you to perform your job objectively and effectively.  For example, a conflict of interest probably exists if:

 

you cause us or our investment adviser, Great Elm Capital Management, Inc. (the “Adviser” ), to enter into business relationships with you or a member of your family, or invest in companies affiliated with you or a member of your family;

 

you, or a member of your family, receive improper personal benefits as a result of your position with us or the Adviser;

 

you use any nonpublic information about us or the Adviser, our customers or our other business partners for your personal gain, or the gain of a member of your family; or

 

you use or communicate confidential information obtained in the course of your work for your or another’s personal benefit.

Corporate Opportunities

Each of us has a duty to advance the legitimate interests of GECC when the opportunity to do so presents itself.  Therefore, you may not:

 

take for yourself personally opportunities, including investment opportunities, discovered through the use of your position with us or the Adviser, or through the use of either’s property or information;

 

use our or the Adviser’s property, information, or position for your personal gain or the gain of a family member; or

 

compete, or prepare to compete, with us or the Adviser.

Confidentiality

You must not disclose confidential information regarding us, the Adviser, our affiliates, our lenders, our clients, or our other business partners, unless disclosure is authorized or required by law.  Confidential information includes all non-public information that might be harmful to, or useful to the competitors of, GECC, our affiliates, our lenders, our clients, or our other business partners.  This obligation continues even after you leave GECC, until the information becomes publicly available.

Fair Dealing

You must endeavor to deal fairly with our customers, suppliers and business partners, or any other companies or individuals with whom we do business or come into contact with, including fellow employees and our competitors.  You must not take unfair advantage of these or other parties by means of:

 

manipulation;

 

concealment;

 

abuse of privileged information;

 

misrepresentation of material facts; or

 

any other unfair-dealing practice.


Protection and Proper Use of Company Assets

Our assets are to be used only for legitimate business purposes.  Theft, carelessness and waste have a direct impact on our profitability.  You should protect our assets and ensure that they are used efficiently.

Incidental personal use of telephones, fax machines, copy machines, personal computers and similar equipment is generally allowed if there is no significant added cost to us, it does not interfere with your work duties, and is not related to an illegal activity or to any outside business.

Compliance with Applicable Laws, Rules and Regulations

Each of us has a duty to comply with all laws, rules and regulations that apply to our business, including those relating to insider trading.  Please talk to our Chief Compliance Officer if you have any questions about how to comply with the above regulations and other laws, rules and regulations.

In addition, we expect you to comply with all our policies and procedures that apply to you.  We may modify or update our policies and procedures in the future, and may adopt new company policies and procedures from time to time.  You are also expected to observe the terms of any confidentiality agreement, employment agreement or other similar agreement that applies to you.

Equal Opportunity, Harassment

We are committed to providing equal opportunity in all of our employment practices including selection, hiring, promotion, transfer, and compensation of all qualified applicants and employees without regard to race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, or any other status protected by law.  With this in mind, there are certain behaviors that will not be tolerated.  These include harassment, violence, intimidation, and discrimination of any kind involving race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, marital status, or any other status protected by law.

Accuracy of Company Records

We require honest and accurate recording and reporting of information in order to make responsible business decisions.  This includes such data as quality, safety, and personnel records, as well as financial records.

All financial books, records and accounts must accurately reflect transactions and events, and conform both to required accounting principles and to our system of internal controls.

Retaining Business Communications

The law requires us to maintain certain types of corporate records, usually for specified periods of time.  Failure to retain those records for those minimum periods could subject us to penalties and fines, cause the loss of rights, obstruct justice, place us in contempt of court, or seriously disadvantage us in litigation.

From time to time we establish retention or destruction policies in order to ensure legal compliance.  We expect you to fully comply with any published records retention or destruction policies, provided that you should note the following exception: If you believe, or we inform you, that our records are relevant to any litigation or governmental action, or any potential litigation or action, then you must preserve those records until we determine the records are no longer needed.  This exception supersedes any previously or subsequently established destruction policies for those records.  If you believe that this exception may apply, or have any questions regarding the possible applicability of that exception, please contact our Chief Compliance Officer.


Political Contributions

No funds of GECC may be given directly to political candidates.  You may, however, engage in political activity with your own resources on your own time, subject, however, to any restrictions contained in the Adviser’s policies.

Media Relations

We must speak with a unified voice in all dealings with the press and other media.  As a result, our Chief Executive Officer or GECC Investor Relations are the only contacts for media seeking information about GECC.  Any requests from the media must be referred to our Chief Executive Officer or GECC Investor Relations.


Intellectual Property Information

Information generated in our business is a valuable asset.  Protecting this information plays an important role in our growth and ability to compete.  Such information includes business and research plans; objectives and strategies; trade secrets; unpublished financial information; salary and benefits data; lender and other business partner lists.  Employees who have access to our intellectual property information are obligated to safeguard it from unauthorized access and:

 

Not disclose this information to persons outside of GECC;

 

Not use this information for personal benefit or the benefit of persons outside of GECC; and

 

Not share this information with other employees except on a legitimate “need to know” basis.

Internet and E-Mail Policy

We provide an e-mail system and Internet access to certain of our employees to help them do their work.  You may use the e-mail system and the Internet only for legitimate business purposes in the course of your duties.  Incidental and occasional personal use is permitted, but never for personal gain or any improper use.  Further, you are prohibited from discussing or posting information regarding GECC in any external electronic forum, including Internet chat rooms or electronic bulletin boards.

Reporting Violations and Complaint Handling

You are responsible for compliance with the rules, standards and principles described in this Code.  In addition, you should be alert to possible violations of the Code by GECC’s or the Adviser’s employees, officers and directors, and you are expected to report a violation promptly.  Normally, reports should be made to one’s immediate supervisor.  Under some circumstances, it may be impractical or you may feel uncomfortable raising a matter with your supervisor.  In those instances, you are encouraged to contact our Chief Compliance Officer who will investigate and report the matter to our Chief Executive Officer and/or Board of Directors, as the circumstance dictates.  You will also be expected to cooperate in an investigation of a violation.

Anyone who has a concern about our conduct, the conduct of an officer of GECC or its Adviser or our accounting, internal accounting controls or auditing matters, may communicate that concern to the Audit Committee of the Board of Directors by direct communication with our Chief Compliance Officer or by email or in writing.  All reported concerns shall be forwarded to the Audit Committee and will be simultaneously addressed by our Chief Compliance Officer in the same way that other concerns are addressed by us.  The status of all outstanding concerns forwarded to the Audit Committee will be reported on a quarterly basis by our Chief Compliance Officer.  The Audit Committee may direct that certain matters be presented to the full board and may also direct special treatment, including the retention of outside advisors or counsel, for any concern reported to it.

All reports will be investigated, and whenever possible, requests for confidentiality shall

be honored.   And, while anonymous reports will be accepted, please understand that anonymity may hinder or impede the investigation of a report.  All cases of questionable activity or improper actions will be reviewed for appropriate action, discipline or corrective actions. Whenever possible, we will keep confidential the identity of employees, officers or directors who are accused of violations, unless or until it has been determined that a violation has occurred.


There will be no reprisal, retaliation, or adverse action taken against any employee who, in good faith, reports or assists in the investigation of, a violation or suspected violation, or who makes an inquiry about the appropriateness of an anticipated or actual course of action.

For reporting concerns about GECC’s or its Adviser’s conduct, the conduct of an officer of GECC or its Adviser, or about GECC’s or its Adviser’s accounting, internal accounting controls or auditing matters, you may use the following means of communication:

 

ADDRESS:

Great Elm Capital Corp.

 

200 Clarendon Street

 

51 st Floor

 

Boston, Massachusetts 02116

In the case of a confidential, anonymous submission, employees should set forth their concerns in writing and forward them in a sealed envelope to the Chairperson of the Audit Committee, in care of our Chief Compliance Officer, such envelope to be labeled with a legend such as: “To be opened by the Audit Committee only.”

Administration of the Code

The Chief Compliance Officer has overall responsibility for administering the Code and reporting on the administration of and compliance with the Code and related matters to our Board of Directors.

Sanctions for Code Violations

All violations of the Code will result in appropriate corrective action, up to and including dismissal.  If the violation involves potentially criminal activity, the individual or individuals in question will be reported, as warranted, to the appropriate authorities.

Application/Waivers

All the directors, officers, and employees of GECC and its Adviser are subject to this Code.

Insofar as other policies or procedures of GECC or its Adviser govern or purport to govern the behavior or activities of all persons who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code.

Any amendment or waiver of the Code for an executive officer or member of our Boards of Directors must be made by our Board of Directors and disclosed on a Form 8-K filed with the Securities and Exchange Commission within four business days following such amendment or waiver.

Revisions and Amendments

This Code may be revised, changed or amended at any time by our Board of Directors.  Following any material revisions or updates, an updated version of this Code will be distributed to you, and will supersede the prior version of this Code effective upon distribution.  We may ask you to sign an acknowledgement confirming that you have read and understood the revised version of the Code, and that you agree to comply with the provisions.


SOX CODE OF BUSINESS CONDUCT AND ETHICS

APPENDIX A

Great Elm Capital Corp.

Acknowledgment Regarding

SOX Code of Business Conduct and Ethics

This acknowledgment is to be signed and returned to our Chief Compliance Officer and will be retained as part of your permanent personnel file.

I have received a copy of Great Elm Capital Corp.’s SOX Code of Business Conduct and Ethics, read it, and understand that the Code contains the expectations of Great Elm Capital Corp. regarding conduct.  I agree to observe the policies and procedures contained in the SOX Code of Business Conduct and Ethics and have been advised that, if I have any questions or concerns relating to such policies or procedures, I understand that I have an obligation to report to the Audit Committee, the Chief Compliance Officer, or other such designated officer, any suspected violations of the Code of which I am aware.  I also understand that the Code is issued for informational purposes and that it is not intended to create, nor does it represent, a contract of employment.

 

 

Name (Printed)

 

 

Signature

 

 

Date

 

The failure to read and/or sign this acknowledgment in no way relieves you of your responsibility to comply with Great Elm Capital Corp.’s SOX Code of Business Conduct and Ethics

 

Exhibit 14.2

CODE OF ETHICS

TOPICS IN THIS CODE

A.

Standard of Conduct

B.

Confidential Information

C.

Material Nonpublic Information

D.

Fiduciary Duty and Conflicts of Interest

E.

Frontrunning

F.

Window Dressing

G.

Unfair Treatment of Certain Clients Vis‑a‑Vis Others

H.

Dealing with Clients as Agent and Principal: Section 206(3) of the Investment Advisers Act of 1940

I.

Personal Trading; Timely Reporting of Trades

J.

Employee’s Responsibility to Know the Rules and Comply with Applicable Laws

K.

Designation and Responsibilities of Chief Compliance Officer

A. STANDARD OF CONDUCT

The purpose of this Code of Ethics is to set forth certain key guidelines that have been adopted by the Company as office policy for the guidance of all Company personnel and to specify the responsibilities of all Employees of the Company (as defined in B.2 below) to act in accordance with their fiduciary duty to the Company’s clients and to comply with applicable federal and state laws and regulations, including, but not limited to, securities laws, governing their conduct.  In particular, Employees should be aware of the requirements of the Investment Advisers Act of 1940.  Careful adherence is essential to safeguard the interests of the Company and its clients, which may include pooled investment vehicles (“ private clients ”) whose interests are issued pursuant to an exemption to the U.S. Investment Company Act of 1940 (the “ 1940 Act ”) or funds whose interests are issued pursuant to the 1940 Act (“ 1940 Act clients ” and, together with private clients, each, a “ client ” and, collectively, “ clients ”).  The Company expects that all Employees will conduct themselves in accordance with high ethical standards, which should be premised on the concepts of integrity, honesty and trust.

As noted, all Employees of the Company must conduct themselves in full compliance with all applicable federal and state laws and regulations concerning the securities industry.  It is the responsibility of every Employee to know these laws and regulations and to comply with them.  If an Employee needs copies of any laws and regulations concerning the securities business or has any questions about the legality of any transaction, the Employee should consult the Company’s Chief Compliance Officer (as defined below).  Failure to comply with such laws and regulations or this Code of Ethics may result in sanctions and possibly, depending on the circumstances, immediate dismissal.


Although our fiduciary duties require more than simply avoiding illegal and inappropriate behavior, at a minimum all Employees should be aware that, as a matter of policy and the terms of their employment with the Company, the following types of activities are strictly prohibited:

Using any device, scheme or artifice to defraud, or engaging in any act, practice, or course of conduct that operates or would operate as a fraud or deceit upon, any client or prospective client or any party to any securities transaction in which the Company or any of its clients is a participant;

Making any untrue statement of a material fact or omitting to state to any person a material fact necessary in order to make the statements the Company has made to such person, in light of the circumstances under which they are made, not misleading;

Engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative, particularly with respect to a client or prospective client; and

Causing the Company, acting as principal for its own account or for any account in which the Company or any person associated with the Company (within the meaning of the Investment Advisers Act) has an interest, to sell any security to or purchase any security from a client in violation of any applicable law, rule or regulation of a governmental agency.

B. CONFIDENTIAL INFORMATION

What is confidential information?

An investment adviser has a fiduciary duty to its clients not to divulge or misuse information obtained in connection with its services as an adviser. Therefore, all information, whether of a personal or business nature, that an Employee obtains about a client’s affairs in the course of employment with the Company should be treated as confidential and used only to provide services to or otherwise to the benefit of the client.  Such information may sometimes include information about non‑clients, and that information should likewise be held in confidence.  Even the fact that the Company advises a particular client should ordinarily be treated as confidential.

Who is subject to the Company’s policies concerning confidential information?

All Company personnel ‑ officers and advisory, marketing, administrative and secretarial staff ‑ are subject to these policies.  (For the sake of convenience, this group is sometimes referred to in this Manual as “ Employees ”).

What are the duties and responsibilities of Employees with respect to confidential information?

Since an investment adviser has a fiduciary duty to its clients not to divulge information obtained from or about a client in connection with its services as an adviser, Employees must not repeat or disclose confidential information received from or about clients outside the Company to anyone, including relatives, friends or strangers.  Any misuse of confidential information about a client is a disservice to the client that may cause both the client and the Company substantial injury.  Failure to comply with this policy may have very serious consequences for Employees and for the Company, including the possibility that Employees might be criminally prosecuted for misusing the information, as described in Part C below.

What are some steps that Employees can take to assure that confidential information is not disclosed to persons outside the office?

There are a number of steps Employees should take to help preserve client and other confidences, including the following:

Employees should be sensitive to the problem of inadvertent or accidental disclosure.  Careless conversation, naming names or describing details of a current or proposed trade, investment or transaction in a lounge, hallway, elevator or restroom, or in a train, taxi, airplane, restaurant or other public place, can result in the disclosure of confidential information and should be strictly avoided.

Maintenance of confidentiality requires careful safeguarding of papers and documents, both inside and outside the Company.  Documents and papers should be kept in appropriately marked file folders and locked in file cabinets


when appropriate.  Computer files or disks should be password protected.   Employees should review the detailed data security policies and procedures which appear later in the Manual.

If an Employee uses a speakerphone, the Employee should be careful to refrain from using it in any way that might increase the likelihood of accidental disclosure.  Use caution, for example, when participating in a speakerphone conversation dealing with confidential information if the office door is open, or if the speakerphone volume is set too high.  The same applies if an Employee knows or suspects that a speakerphone or a second extension phone is being used at the other end of a telephone conversation.

In especially sensitive situations, it may be necessary to establish barriers to the exchange of information within the Company and to take other steps to prevent the leak of confidential information.

Employees should be aware that e-mail and information transmitted through the Internet may not be secure from hacking or interception and should be cautious in transmitting confidential information by e-mail or through the Internet.  Employees should review the detailed data security policies and procedures as well as policies regarding the use of social media which appear later in the Manual.

C. MATERIAL NONPUBLIC INFORMATION

All Employees are reminded that purchasing or selling securities on the basis of, or while in possession of, material nonpublic information for their own, for a client’s or for the Company’s account is a crime punishable by imprisonment as well as large fines.  “Tipping” another person who engages in such activities is also a crime.   The term “material” is described below.

The sanctions for trading securities while in possession of material nonpublic information regarding the issuer of such securities can be severe.  In recent years, the Securities and Exchange Commission (“ SEC ”) has aggressively sought and prosecuted persons who trade securities on the basis of “inside information.”  Courts are now authorized to impose fines of up to three times the profit gained, or loss avoided, on such transactions.  Criminal prosecution is also possible.  Willful misuse of material nonpublic information in connection with the trading of securities will result in dismissal from employment by the Company.

Employees should be careful to avoid even the appearance of wrongdoing.  Even an innocent purchase or sale of securities by an Employee who is unaware that other Employees possess material nonpublic information about an issuer may damage the Company’s reputation and may lead to protracted investigations and audits of both the Company and Employees.

The following sections of this Code of Ethics seek to answer some of the most commonly asked questions about insider trading.  In the questions and answers that follow, the term “issuer” refers to an entity, such as a corporation, partnership or state agency that has issued securities, and the term “securities” includes privately held and publicly traded stocks, bonds, options and other investment instruments that the SEC considers to be securities.

Who is subject to the insider trading rules?

All Employees and all persons ‑ friends, relatives, business associates and others ‑ who receive nonpublic material inside information from Employees concerning an issuer of securities (whether such issuer is a client or not) are subject to these rules.  It does not matter whether the issuer is public or private.  Furthermore, if any Employee gives nonpublic material inside information concerning an issuer of securities to a person outside the Company, and that person trades in securities of that issuer, the Employee and that person may both have civil and criminal liability.

What is material nonpublic information?

Generally speaking, nonpublic information is information about an issuer’s business or operations (past, present or prospective) that becomes known to an Employee and which is not otherwise available to the public.  Although neither the courts nor the SEC has defined “material” precisely, the word is similar in meaning to “important” or “significant.”


While the exact meaning of the word “material” is not entirely clear, it is clear that if a person knows information about an issuer which the person believes would influence an investor in any investment decision concerning that issuer’s securities and which has not been disclosed to the public, the person should not buy or sell that issuer’s securities.  Under current court decisions, it makes no difference whether the material inside information is good or bad.  Needless to say, if the undisclosed information would influence an Employee’s own decision to buy or sell or to trade for a client or the Company, the information probably is material and an Employee should not trade or permit the Company to trade for a client or itself until it has been publicly disclosed.

How does “material nonpublic information” differ from “confidential information”?

Here is an example that should clarify the difference between the two.  Suppose the Company is engaged by the president of a publicly‑traded corporation to provide advice with respect to her personal pension fund and while working on the matter an Employee learns the amount of alimony she pays to her former spouse.  That discovery should be kept confidential, but it almost certainly has no bearing on the value of her corporation’s securities (i.e., it is not material) and, in fact, it probably is not “inside information” about the corporation itself.  Accordingly, an Employee of the Company could buy or sell securities of that issuer so long as the Employee possessed no material nonpublic information about the corporation.  But disclosure of the president’s alimony payments would be embarrassing to her and improper.

In other words, confidential information should never be disclosed, but it is not always material nonpublic information.  Knowing it is not necessarily an impediment to participating in the securities markets concerning a particular issuer.

Are there certain kinds of information that are particularly likely to be “material nonpublic information”?

Yes.  While the following list is by no means complete, information about the following subjects is particularly sensitive:

Dividends, stock dividends and stock splits.

Sales and earnings and forecasts of sales and earnings.

Changes in previously disclosed financial information.

Corporate acquisitions, tender offers, major joint ventures or merger proposals.

Significant negotiations, new contracts or changes in significant business relationships.

Changes in control or a significant change in management.

Adoption of stock option plans or other significant compensation plans.

Proposed public or private sales of additional or new securities.

Significant changes in operations.

Large sales or purchases of stock by principal stockholders.

Purchases or sales of substantial corporate assets, or decisions or agreements to make any such purchase or sale.

Significant increases or declines in backlogs of orders.

Significant new products to be introduced.

Write‑offs.

Changes in accounting methods.

Unusual corporate developments such as major layoffs, personnel furloughs or unscheduled vacations for a significant number of workers.

Labor slowdowns, work stoppages, strikes, or the pending negotiation of a significant labor contract.


Significant reductions in the availability of goods from suppliers or shortages of these goods.

Extraordinary borrowings.

Major litigation.

Governmental investigations concerning the Company or any of its officers or directors.

Financial liquidity problems.

Bankruptcy proceedings.

Establishment of a program to repurchase outstanding securities.

If an Employee believes he or she is in receipt of material nonpublic information or has any questions regarding whether such information may constitute material nonpublic information he or she should immediately alert the Company’s Chief Compliance Officer.

What is the law regarding the use of material nonpublic information?

Federal law, and the policy of the Company, prohibit any Employee from trading securities on the basis of material nonpublic information, whether obtained in the course of working at the Company or otherwise, for his or her private gain, for the Company’s gain or for a client’s gain and prohibit any Employee from furnishing such information to others for their private gain.  This is true whether or not the information is considered “confidential”.  When in doubt, the information should be presumed to be material and not to have been disclosed to the public.  No trades of securities should be executed for any Employee, any client or for the Company, if the person executing the trade or the Company has material nonpublic information about the issuer.

What is “tipping”?

Under the federal securities laws, it is illegal to disclose (or “tip”) material nonpublic information regarding an issuer of securities to another person who subsequently uses that information for his or her profit.  In order to minimize this liability, all Company personnel should comply with the policies regarding protection of confidential information described in Part A above, which will include the following measures:

To reduce the chances of inadvertent tipping of material nonpublic information, any nonpublic information that might be considered material should not be discussed with any person outside the Company.  Such information should be regarded as particularly sensitive, confidential information, and the Company’s policies for safeguarding such information should be strictly observed.

Caution must be used when receiving information from securities analysts and members of the press which could be material nonpublic information.

Disclosure outside the Company of confidential information by an Employee, or participation or tipping others to participate in securities transactions when in possession of material nonpublic information, may be a violation of law and subject the employee to severe penalties, including criminal prosecution.

To whom must material nonpublic information be disclosed before it is no longer nonpublic information?

To the public.  Public disclosure of material events is usually made by means of an official press release or filing with the SEC.  An Employee’s disclosure to a broker or other person will not be effective, and such Employee may face civil or criminal liability if such Employee (or the person to whom the Employee makes disclosure) trades on the basis of the information.  Employees should be aware that in most cases they are not authorized to disclose material events about an issuer to the public and that right usually belongs to the issuer alone.

How does an Employee know whether particular material nonpublic information has been publicly disclosed?

If an Employee sees information in a newspaper or public magazine, that information will clearly have been disclosed.  Information in a filing with the SEC or a press release will also have been disclosed.  However, the courts


have said that one should wait for a reasonable period of time after the publication, filing or release date to assure that the information has been widely disseminated and that the public has had sufficient time to evaluate the news.  If any Employee has any questions about whether information has been disclosed, such Employee should not trade in the affected securities.  An Employee should contact the Company’s Chief Compliance Officer for advice in the matter.

What must an Employee do with respect to material nonpublic information that such Employee may learn about an issuer?

In connection with their work at the Company, Employees may come into possession of material nonpublic information with respect to issuers such as information with respect to issuers or securities of issuers which are being analyzed for purchase or sale.  This is particularly likely to happen in connection with the recommendation of the purchase or sale of an issuer’s securities.  All personnel receiving material, nonpublic information have a duty not to disclose or use that information in connection with securities transactions.  In other words, Employees may not purchase or sell any securities with respect to which they have inside information for their own, the Company’s or for a client’s account or cause clients to trade on such information until after such information becomes public.  The foregoing prohibition applies whether or not the material inside information is the basis for the trade.  Employees should be alert for information they receive about issuers which may be material nonpublic information.  In addition, whenever Employees come into possession of what they believe may be material nonpublic information about an issuer, they must immediately notify the Chief Compliance Officer because the Company as a whole may have an obligation not to trade in the securities of the issuer.  The Chief Compliance Officer shall maintain a list of all issuers about which the Company has inside information and shall circulate such list to the appropriate personnel at the Company so as to prevent any trading in securities of such issuers.

Who is available for additional advice or advice about a particular situation?

The Company’s Chief Compliance Officer will oversee matters relating to inside information and prohibitions on insider trading.

D. FIDUCIARY DUTY AND CONFLICTS OF INTEREST

The Company and the Employees have a fiduciary duty to Company clients to act for the benefit of the clients and to take action on the clients’ behalf before taking action in the interest of any Employee or the Company.  The cornerstones of the fiduciary duty are the obligations to act for the clients’ benefit and to treat the clients fairly.  Clients may therefore expect their fiduciaries to act for the clients’ benefit and not for the fiduciary’s own benefit when a conflict of interest between the client and the fiduciary arises.  No Employee should ever enjoy an actual or apparent advantage over the account of any client.

This Manual attempts to highlight and address many of the common conflicts of interest that may arise between the Company and its employees on the one hand and clients on the other, and also between different client accounts.  It is not possible for every conflict to be addressed in this Manual, however, and Employees should be particularly sensitive to the existence of actual or potential conflicts of interest not addressed herein and should promptly raise any such conflicts of which they become aware with the Chief Compliance Officer.

The manner in which any Employee discharges his or her fiduciary duty and addresses a conflict of interest depends on the circumstances.  Sometimes general disclosure of common conflicts of interest may suffice.  In other circumstances, explicit consent of the client to the particular transaction giving rise to a conflict of interest may be required or an Employee may be prohibited from engaging in the transaction regardless of whether the client consents.

The client’s consent will not in all cases insulate the Employee against a claim of breach of the Employee’s fiduciary duty.  Full disclosure of all material facts must be given if consent is to be effective.  As a result, consents concerning possible future breaches of laws will not usually work.  However, waivers of known past violations may be effective.  In addition, a client under the control and influence of the Employee or who has come to rely on the Employee’s investment decisions cannot effectively consent to a conflict of interest or breach of fiduciary duty.  Consent must be competent, informed and freely given.


The duty to disclose and obtain a client’s consent to a conflict of interest must always be undertaken in a manner consistent with the Employee’s duty to deal fairly with the client.  Therefore, even when taking action with a client’s consent, each Employee must always seek to assure that the action taken is fair to the client.

Conflicts of interest can arise in any number of situations.  As noted, no comprehensive list of all possible conflicts of interest can be provided in this Code of Ethics.  However, the following are common examples of conflicts of interest.  For example, an Employee may seek to induce a bank to give the Employee a loan in exchange for maintaining excessive cash balances of a client with the bank or may execute trades for a client through a broker-dealer that provides research services for the Company but charges commissions higher than other broker-dealers.  In the former case, such activity would be a violation of an Employee’s fiduciary duty and might subject the Employee and the Company to liability under the Investment Advisers Act of 1940 (the “ Advisers Act ”) and other applicable laws.  In the latter case, if the Company determines in good faith that the higher commissions are reasonable in relation to the value of the brokerage and research services provided by a broker or dealer viewed in terms of either a particular transaction or the Company’s overall responsibilities with respect to an account as to which the Company exercises investment discretion and appropriate disclosure is made to the client and in the Company’s Form ADV, the payment of higher commissions may be permitted under the safe harbor of Section 28(e) of the Securities Exchange Act of 1934.

Another common conflict of interest occurs when the Company pays some consideration to a person for recommending the Company as an adviser.  In those circumstances, an Employee must make disclosure to any prospective client of any consideration paid for recommending the Company’s services to that prospective client and the Company must comply with Rule 206(4)-3 promulgated under the Advisers Act.  This Rule governs situations involving cash payments for client solicitations and requires that specific disclosure documents, containing information about the solicitor and the adviser, be provided to a prospective client at the time of the solicitation.  See Item XII of this Manual for additional information regarding the Company’s “Pay-to-Play” restrictions and reporting requirements.

Commissions. Employees may negotiate with broker-dealers regarding the commissions charged for their personal transactions but may not enter into any arrangement to pay commissions at a rate that is better than the rate available to clients through similar negotiations.  

Gifts and Entertainment.   No Employee may give or receive any gift, service or other item of more than nominal value ($250 or less) to or from any person or entity that does business with or on behalf of any client.  In addition, multiple gifts given by the same vendor or received by the same employee shall not exceed $1,000 in any calendar year.  However, Employees may attend business meals, sporting events and other similar events provided the cost is reasonable and the gift giver also is present at the event.  In addition, each Employee must submit a request through the Company’s automated compliance software, Schwab Compliance Technologies (f/k/a Compliance11) (“ SCT ”), for approval of any gift given or received that sets forth the amount of the gift, a description of the gift, the reason for the gift and the third party (including the specific person) who gave or received the gift.    Notwithstanding the foregoing, no gift of any amount may be given to any client which is a government pension plan or other type of government client, no gift may be made to a political candidate except in compliance with the Company’s policy on political contributions set forth in this Manual, and gifts to brokers may not exceed $100 per annum.

Service as a Director or Member of Investment Committee.   From time to time Employees may serve as directors of companies in which clients hold securities as a way of monitoring and/or influencing such investment.  Any Employee who wishes to serve as an officer or director of any company, or of any organization where such duties might require involvement in investment decisions, or who wishes to serve on the investment committee of any organization, must (i) report such outside business activity through the Company’s automated compliance software and (ii) obtain the prior written consent of the Chief Compliance Officer, which shall be granted in his discretion and only if he is satisfied that such service shall not create a conflict with such Employee’s fiduciary duty to clients.  All fees, equity grants and other compensation received by an Employee in his or her capacity as a director of a company in which clients hold securities shall be paid over to such clients pro rata in accordance with such holdings.

If any Employee is faced with any conflict of interest as a result of taking a board position or otherwise, he or she should promptly consult the Company’s Chief Compliance Officer prior to taking any action.


E. FRONTRUNNING

As a general rule, if any Employee knows of a pending “buy” recommendation and buys stock before the Company takes action for its clients, or if any Company Employee is aware of a pending “sell” recommendation and sells stock under such circumstances, such Employee is engaged in a practice known as “frontrunning.”

An Employee or family member residing in that Employee’s household or person or entity over which the Employee has control (the “ Related Person(s) ”) may not engage in the practice of purchasing or selling stock before the Company takes action for its clients.  Such activities put the Company and the Employee in a conflict of interest and give the Employee or the Related Person an advantage at the client’s expense.  Any trades undertaken for an Employee’s own account, for the account of the Company, for the account of any non‑Company client or for a Related Person must be done so as not to disadvantage a Company client in any way.  This means that, subject to compliance with the Company’s personal trading policy (described under Item I of this Manual), including the prohibition on trading of company specific securities held by a client of the Company, all Employees and their Related Persons must generally wait to trade a security until all trading in that security for all accounts of the Company’s clients is completed.  If all client trades are not completed before an Employee or Related Person trades, the antifraud provisions of the Advisers Act may be violated.

In order to preclude the possibility that material nonpublic information about the Company’s investment decisions and recommendations, and client securities holdings and transactions, could be misused, the Company has taken steps to restrict access to such information to Employees who need such information to perform their duties, including the use of password protection on computer files and limiting physical access to paper storage records.  Employees who are not authorized to access such information may be subject to termination if they attempt to do so.

F. WINDOW DRESSING

Window dressing refers to the practice of buying additional lots of the highest returning securities or selling the worst performing securities in a portfolio shortly before the end of the reporting period in order to convey the impression of stronger performance during such period. The Company seeks to prevent instances of window dressing or potential window dressing in a variety of fashions. First, the Company’s Investment Committee, comprised of its Chief Investment Officer, Portfolio Managers, Head Trader, Chief Operating Officer and General Counsel and certain senior investment professionals, must approve any decision to purchase new securities before they are added to a client’s portfolio.  Second, any decision to exit a position either in part or in whole must be approved by a majority of the Investment Committee.  Third, all such trades are made in accordance with the applicable Fund’s investment guidelines and reviewed by the Chief Compliance Officer no less frequently than daily. Fourth, all positions are valued at month end using third party prices where available pursuant to the Company’s securities valuation policy (as further described below).  As a result, all trades, including the timing thereof, must go through several different levels of review and approval in order to prevent window dressing.

G. UNFAIR TREATMENT OF CERTAIN CLIENTS VIS ‑A‑VIS OTHERS

An Employee who handles one or more clients may be faced with situations in which it is possible to give preference to certain clients over others.  Employees must be careful not to give preference to one client over another even if the preferential treatment would benefit the Company or the Employee.

For example, an Employee should not (i) give sale advice to one client ahead of another, or (ii) direct securities of a limited supply and higher potential return to particular clients because they generate larger fees for the Company.

As in other instances, the fiduciary duty of an Employee to a client must govern the Employee’s actions in each situation and the extent of the fiduciary duty of an Employee to a client is determined by the specific relationship between the parties and the reasonable inferences to be drawn from the relationship.  In the absence of express or implied agreements between the parties, usage and custom should be used to determine how an Employee should discharge his or her duty.  Each situation should be examined closely to determine whether the client has consented to the Employee’s actions favoring another client, taking into account, among other things, differences in investment objectives and risk mandates among clients, and whether the resulting relationship with the client which was not favored is fair and consistent with the securities laws.  If both parts of this test have been satisfied, most likely there has been no breach of fiduciary duty.  If a question arises about action that may give rise to a conflict of interest involving


preferential treatment of one client over another, an Employee should consult the Company’s Chief Compliance Officer prior to taking any action.

H.

DEALING WITH CLIENTS AS AGENT AND PRINCIPAL: SECTION 206(3) OF THE ADVISERS ACT

Section 206(3) of the Advisers Act addresses two specific conflict of interest situations:  sale and purchase of securities to and from a client either as a broker for another person or as a principal for the account of the adviser.  Section 206(3) makes it unlawful for an investment adviser “acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction.”

Thus, Section 206(3) requires that Employees involved in the situations where the Company is buying or selling securities from a client or where the Company acts as a broker-dealer for a non-client in a transaction with an advisory client disclose to the client the capacity in which the Company acts and obtain the client’s consent prior to the transaction.  Disclosure under Section 206(3) must be in writing.  The Company must, under Section 206(3), disclose to the client its capacity, its profits (if it acts as principal) and its commissions (if it acts as agent for another).  These types of transactions can be particularly troublesome under applicable laws and must not be entered into without prior consultation with the Company’s Chief Compliance Officer.

I. PERSONAL TRADING; TIMELY REPORTING OF TRADES

1.

Personal Trading

Set forth below are the Company’s policies regarding personal trading.  These policies apply to all Access Persons.  Under the Advisers Act, Access Persons include any of the Company’s partners, officers, directors (or other persons occupying a similar status or performing similar functions) and Employees who have access to nonpublic information regarding clients’ purchases or sales of securities, is involved in making securities recommendations to clients or who has access to such recommendations that are nonpublic.  Because the Company’s primary business is providing investment advice, the Advisers Act presumes that all officers, directors and partners are Access Persons.  Because of the Company’s size and the range of duties that Employees may have, all Employees are considered “Access Persons,” and “Access Person” procedures, standards and restrictions that might be imposed only on a limited subset of Employees in another, larger organization, apply to all Employees. Many of the procedures, standards and restrictions in this section govern activities in “Covered Accounts.”  Covered Accounts include each securities account registered in an Employee’s name and each account or transaction in which an Employee has any direct or indirect “beneficial ownership interest.”  The term “beneficial ownership interest” has a very broad meaning, discussed more completely below, and can include accounts of corporations owned by the Employee and even accounts owned by certain family members. An Employee has a “beneficial ownership” interest in not only securities he or she owns directly, and not only securities owned by others specifically for his or her benefit, but also (i) securities held by the Employee’s spouse, minor children and relatives who live in the Employee’s home, and (ii) securities held by another person if by reason of any contract, understanding, relationship, agreement or other arrangement the Employee obtains benefits substantially equivalent to ownership.   Examples of some of the most common of those arrangements are as follows:

 

a.

By an Employee for his/her own benefit, whether bearer, registered in his/her own name, or otherwise;

 

b.

By others for the Employee’s benefit (regardless of whether or how registered), such as securities held for the Employee by custodians, brokers, relatives, executors or administrators;

 

c.

For an Employee’s account by a pledge;

 

d.

By a trust in which an Employee has an income or beneficiary interest unless the Employee’s only interest is to receive principal if (a) some other beneficiary dies before distribution or (b) if some other person can direct by will a distribution of trust property or income to the Employee;

 

e.

By an Employee as trustee or co-trustee, where either the Employee or any member of his/her immediate family (i.e., spouse, children and their descendants, stepchildren, parents and their ancestors, and stepparents, in each case treating a legal adoption as blood relationship) has an income or remainder interest in the trust;


 

f.

By a trust of which the Employee is the trustee, if the Employee has the power to revoke the trust without obtaining the consent of all the beneficiaries;

 

g.

By any non-public partnership in which the Employee is a partner;

 

h.

By a personal holding company controlled by the Employee alone or jointly with others;

 

i.

In the name of the Employee’s spouse unless legally separated;

 

j.

In the name of minor children of the Employee or in the name of any relative of the Employee or of his/her spouse (including an adult child) who is presently sharing the Employee’s home.  This applies even if the securities were not received from the Employee and the dividends are not actually used for the maintenance of the Employee’s home;

 

k.

In the name of any person other than the Employee and those listed in (i) and (j) above, if by reason of any contract, understanding, relationship, agreement, or other arrangement the Employee obtains benefits substantially equivalent to those of ownership;

 

l.

In the name of any person other than the Employee, even though the Employee does not obtain benefits substantially equivalent to those of ownership (as described in (k) above), if the Employee can vest or revest title in himself/herself.

This broad definition of “beneficial ownership” is for purposes of this Code of Ethics only; it does not necessarily apply for purposes of other securities laws or for purposes of estate or income tax reporting or liability.  To accommodate potential differences in concepts of ownership for other purposes, an Employee may include in his/her reports a statement declaring that the reporting or recording of any securities transaction shall not be construed as an admission that the reporting person has any direct or indirect beneficial ownership in the security.

Preclearance.   No Employee may buy, sell, or pledge a Company Specific Security for any Covered Account without obtaining clearance from a portfolio manager and the Chief Compliance Officer in SCT before the transaction, specifying the securities involved, the date and the price at which the Employee seeks to transact, and certifying that the Employee does not have any material non-public information regarding such Company Specific Security. A “Company Specific Security” means any security issued directly by a company or economically related to a company i.e. stocks, bonds and/or derivatives where the underlying security is a single issuer. Company Specific Securities requiring pre-clearance shall also include all private clients, 1940 Act clients and other funds and accounts advised or sub-advised by the Company.  Securities for which preclearance is not required are Exchange Traded Funds (ETFs), open and closed ended mutual funds (other than 1940 Act clients), commodities, and currencies, and hedge funds (other than private clients and funds that must be preapproved as set forth below). Although the securities listed in the preceding sentence do not need preclearance (except as noted therein), each Employee must still report all transactions and positions in such securities per the Employee reporting section unless such section also specifically excludes them from having to be reported. It is each Employee’s responsibility to obtain pre-approval in SCT prior to executing the transaction.   Transactions effected without preclearance are subject, in the Chief Compliance Officer’s discretion (after consultation with other members of management, if appropriate), to being reversed or, if the Employee made profits on the transaction, to disgorgement of such profits.  Additionally, the Chief Compliance Officer’s trades shall be approved by the Chief Operating Officer and a portfolio manager.

The Chief Compliance Officer need not specify the reasons for any decision to clear or deny clearance for any proposed transaction.  As a general matter, due to the difficulty of showing that an Employee did not know of client trading activity or recommendations, the Chief Compliance Officer should not be expected to clear transactions in securities as to which the Company has client activity, although the Chief Compliance Officer may determine that a particular transaction in such a security does not, under the circumstances, create the appearance of impropriety and permit it. 1

 

 

 

 

 

 

1 For example, if an Employee seeks to sell a security he or she has owned for a significant time and the Company is considering buying the same or a related security for clients, the Compliance Officer may determine no appearance of impropriety exists.  


Transaction orders should be placed promptly after approval is given and in any case must be placed within two trading days after the day approval is granted.   The applicable portfolio manager or the Chief Compliance Officer may revoke a pre-approval at any time for any reason, and shall in such case promptly notify the Employee.

Policy on Short‑Term Trading.   Employees are prohibited from engaging in the purchase and sale, or sale and purchase, for a Covered Account of the same (or equivalent) Company Specific Security within any period of 30 calendar days absent approval from the Chief Compliance Officer for such a transaction.

New Issue Securities and Private Placements.   No Employee may purchase any equity securities issued in an initial public offering (“ New Issue Securities ”) or any securities offered in a “private placement” (including interests in hedge funds or other private funds) for any Covered Account without the prior written approval of the Chief Compliance Officer.   In determining whether to approve any such transaction for an Employee, the Chief Compliance Officer will consider, among other factors, whether the investment opportunity should be reserved for client accounts and whether the investment opportunity is being offered to the Investment Employee by virtue of his or her position with the Company.

Securities owned by Company clients.   Generally, no Employee may own the same Company Specific Security owned by a client of the Company. If a Covered Person owns a Company Specific Security before a client acquires it, they may not engage in any additional trading in the security (i.e., buying or selling) until two weeks after the client has fully exited the position, unless there is an exceptional circumstance and approval is sought and given by a portfolio manager and the Chief Compliance Officer.  If the Company determines on behalf of a client that it will not acquire any additional Company Specific Securities of a particular issuer, Employees may purchase such securities for their Covered Accounts with the prior approval of a portfolio manager and the Chief Compliance Officer; provided, that Employees may not engage in any additional trading in the security (i.e., buying or selling) until two weeks after the client has fully exited the position.

2.

Employee Reporting

Report of Holdings.   Each Employee within 10 days of commencement of employment must submit through SCT an initial holdings report disclosing to the Chief Compliance Officer the identities, amounts, and locations of all securities owned in all Covered Accounts -- i.e., accounts in which he or she has a “beneficial ownership interest.”  In addition, each Employee must disclose through SCT similar information within thirty (30) days after the end of each calendar year while employed by the Company.   Such reports are automatically generated and distributed by SCT to all Employees and must be current as of a date note more than 45 days prior to the Employee joining the Company (for an initial report) or the date the report is submitted (for the annual report).

Brokerage Accounts.   Each Employee must disclose in SCT each broker, bank, or other financial institution in which the Employee has a Covered Account ( i.e., a securities trading account in which the Employee has any direct or indirect beneficial ownership interest), which receives electronic feeds of all trading activity in such Covered Accounts directly from such brokers, banks or financial institutions on a daily basis.  Employees are required to certify that it has disclosed all Covered Accounts in SCT on a quarterly basis.

Quarterly Reports.   Each Employee must report to the Chief Compliance Officer within 30 days after the end of each calendar quarter through SCT all securities transactions in all of the Employee’s Covered Accounts during the preceding quarter.

In filing holdings and transactional reports, Employees must note that:

 

Each Employee must file a transactional report every quarter whether or not there were any reportable transactions.

 

Transactional reports must show all sales, purchases, or other acquisitions or dispositions, including gifts, the rounding out of fractional shares, exercises of conversion rights, exercises or sales of subscription rights and receipts of stock dividends or stock splits.

 

Employees need not report holdings or transactions (i) effected pursuant to an automatic investment plan (however, any transaction that overrides or changes the preset contribution schedule or allocations under such plan should be reported), (ii) with respect to securities held in accounts over which the Employee has


 

no direct influence or control (such as a blind trust), (iii) in direct obligations of the U.S. Government , (iv) in money market instruments, bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short term debt instruments, (v) shares of money market funds, (vi) shares of open-ended mutual funds for which the Company does not serve as investment adviser or sub-advisor (holdings of and transactions in exchange traded funds and closed-end funds must be reported) and (vii) transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated open-end mutual funds. Notwithstanding the foregoing, Employees should note that pursuant to SEC guidance issued in June 2015, GECM has an obligation to obtain certain further disclosures and affirmations regarding accounts over which an Employee has no direct influence or control.  Employees are required to disclose this information to the Company through SCT.

J.

EMPLOYEE’S RESPONSIBILITY TO KNOW THE RULES AND COMPLY WITH APPLICABLE LAWS

Employees are responsible for their actions under the law and therefore required to be sufficiently familiar with the Advisers Act, 1940 Act and other applicable federal and state securities laws and regulations to avoid violating them.  It is the policy of the Company to comply with all applicable laws, including securities laws, in all respects.  Each Employee must promptly report any violation of the Code of Ethics of which he or she becomes aware to the Chief Compliance Officer, regardless of whether the violation was committed by the Employee or another Employee.  The Chief Compliance Officer shall consider whether it is appropriate to protect the confidentiality of the identity of an Employee reporting a violation by another Employee.  It is the strict policy of the Company that no Employee shall be subject to any form of retaliation in connection with reporting a violation of the Code of Ethics, and any person found to have engaged in retaliation may be subject to dismissal or other sanction.

Employees must certify in writing on an annual basis using the Company’s automated compliance software, that they have read and understood this Manual, that they will conduct themselves professionally in complete accordance with the requirements and standards described here and that they are not aware of any violations of the Code of Ethics during the prior year.

K. DESIGNATION OF AND RESPONSIBILITIES OF COMPLIANCE OFFICER

Robert Wilson shall serve as the Company’s Chief Compliance Officer. It will be the responsibility of the Chief Compliance Officer of the Company to oversee the enforcement of the matters described in this Manual and to educate Employees to their responsibilities herein.

Without limiting the responsibilities of the Chief Compliance Officer specifically addressed in other sections of this Manual, the responsibilities of the Compliance Officer are as follows:

 

Overseeing the enforcement of the matters described in this Manual.

 

Educating Employees with respect to their responsibilities under this Manual, including reviewing the Manual with new Employees and having Employees recertify each year that they are familiar with the Manual and their obligations hereunder.  (The Chief Compliance Officer will provide new Employees with a copy of this Manual as soon as possible after they join the Company and, upon their request, a copy of the Advisers Act and other applicable laws and regulations.)

 

Conducting training for new and existing Employees on the provisions and requirements of this Manual from time to time as the Chief Compliance Officer determines to be appropriate.

 

Staying current with significant new legal developments in the area of investment advisory services and conveying such developments to the Company Employees as appropriate.

 

Reviewing all Employee trading reports in a timely manner to identify any violation of the Code of Ethics’ approval procedures and any improper trades or any patterns of trading (including achieving execution or results which differ materially from the execution or results obtained for clients) which suggest that an Employee may be engaging in abusive practices, and take such action as he deems necessary to obtain compliance with the policies set forth in this Manual and with applicable laws provided, however, that the


 

trading report of the Chief Compliance Officer shall be reviewed by the Chief Operating Officer or Portfolio Manager of the Company.

 

Reviewing this Manual no less frequently than annually and recommending changes as appropriate or necessary.  The review shall include consideration of any compliance matters that arose during the prior year, whether the existing policies have proven effective and any changes in the business activities of the Company and any changes in the Advisers Act and related regulations that might necessitate revisions to the Manual.  Pursuant to the annual review, the Chief Compliance Officer will document the conclusions of his review in writing.

 

 

Exhibit 21.1

 

Subsidiaries of Great Elm Capital Corp

 

Name Jurisdiction

FC Shale, Inc. Delaware

TransAmerican Asset Servicing, Inc. Delaware

 

        In addition, we may be deemed to control certain portfolio companies identified as "Affiliated" companies that we "Control" as noted in footnote 12 to the Consolidated Financial Statements as of December 31, 2016 included in Great Elm Capital Corp’s Form 10-K for the year ended December 31, 2016.

Exhibit 31.1

Certification of Chief Executive Officer

I, Peter A. Reed, Chief Executive Officer of Great Elm Capital Corp., a Maryland corporation (the “Registrant”) certify that:

1.

I have reviewed this annual report on Form 10-K of the Registrant;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.

The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c.

evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.

The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the Registrant’s board of directors:

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Dated: March 29, 2017

 

/s/ Peter A. Reed

 

 

 

 

 

Peter A. Reed

 

Exhibit 31.2

Certification of Chief Financial Officer

I, Michael J. Sell, Chief Financial Officer of Great Elm Capital Corp., a Maryland corporation (the “Registrant”) certify that:

1.

I have reviewed this annual report on Form 10-K of the Registrant;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.

The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

a.

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c.

evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.

disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.

The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the Registrant’s board of directors:

 

a.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Dated: March 29, 2017

 

/s/ Michael J. Sell

 

 

 

 

 

Michael J. Sell

 

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with this Annual Report on Form 10-K of Great Elm Capital Corp., a Maryland corporation (the “Registrant”), for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Peter A. Reed, as Chief Executive Officer of the Registrant, and Michael J. Sell, as Chief Financial Officer of the Registrant, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Registrant.

 

Dated: March 29, 2017

 

/s/ Peter A. Reed

Peter A. Reed

Chief Executive Officer

(Principal Executive Officer)

 

/s/ Michael J. Sell

Michael J. Sell

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)