POS 8C
Table of Contents

As filed with the Securities and Exchange Commission on August 21, 2018

Securities Act File No. 333-217222

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-2

 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

  Pre-Effective Amendment No.         
  Post-Effective Amendment No. 3    

 

 

GREAT ELM CAPITAL CORP.

(Registrant’s Exact Name as Specified in Charter)

 

 

800 South Street, Suite 230

Waltham, Massachusetts 02453

(Address of Principal Executive Offices)

(617) 375-3006

(Registrant’s Telephone Number, including Area Code)

Peter A. Reed

Chief Executive Officer and President

Great Elm Capital Corp.

800 South Street, Suite 230

Waltham, Massachusetts 02453

(Name and Address of Agent for Service)

 

 

Copies to:

Rory T. Hood

Jones Day

250 Vesey Street

New York, New York 10281

(212) 326-3939

 

 

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

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

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

  when declared effective pursuant to section 8(c).

 

 

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED AUGUST 21, 2018

 

LOGO

 

 

This prospectus relates to the resale from time to time of up to 7,000,268 shares (the “Secondary Shares”) of common stock, par value $0.01 per share, of Great Elm Capital Corp., a Maryland corporation, by the selling stockholders identified in this prospectus and any applicable prospectus supplement (the “Selling Stockholders”).

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

Our common stock is traded on The Nasdaq Global Market (“Nasdaq”) under the symbol “GECC.” On August 20, 2018 the last reported sales price of our common stock on Nasdaq was $9.55 per share. The net asset value per share of our common stock at June 29, 2018 (the last date prior to the date of this prospectus on which we determined net asset value) was $11.79. Shares of closed-end investment companies, including BDCs, frequently trade at a discount from their net asset value. Our shares currently trade at a discount to our net asset value, and further discounts will increase the risk of loss for you.

We will not receive any of the proceeds from the sale of the Secondary Shares. The Selling Stockholders will pay all fees and expenses incurred in this offering and in disposing of the Secondary Shares, including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses of counsel, independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes. The Selling Stockholders have reimbursed us for approximately $762,643 for fees and expenses invoiced to date in connection with the registration and disposition of the Secondary Shares. We have incurred, and estimate that we will incur, an additional $305,000 of fees and expenses for a total of approximately $1,072,790 of fees and expenses, all of which are required to be reimbursed by the Selling Stockholders under the amended and restated registration rights agreement, dated as of November 4, 2016 (the “Registration Rights Agreement”). Each of the Selling Stockholders or its pledgees, donees, assignees, transferees or other successors-in-interest, may offer and sell the Secondary Shares from time to time through public or private transactions at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices.

This prospectus sets forth concisely important information you should know before investing in our common stock. Please read it and the documents we refer you to carefully in their entirety before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission (the “SEC”). We maintain a website at http://www.greatelmcc.com and we make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website. You may also obtain such information and make stockholder inquiries by contacting us at 800 South Street, Suite 230, Waltham, MA 02453, or by calling us collect at (617) 375-3006. The SEC maintains a website at http://www.sec.gov where such information is available without charge.

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

 

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus and any risk factors included in any accompanying prospectus supplement and in the documents incorporated by reference in this document, including the risk of leverage.

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

 

 

This prospectus is dated                 , 2018.


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TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii  

PROSPECTUS SUMMARY

     1  

FEES AND EXPENSES

     6  

SELECTED FINANCIAL DATA

     8  

RISK FACTORS

     9  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

     34  

USE OF PROCEEDS

     35  

SELLING STOCKHOLDERS

     36  

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

     38  

THE COMPANY

     54  

MANAGEMENT

     77  

RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS

     86  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

     87  

DETERMINATION OF NET ASSET VALUE

     89  

DIVIDEND REINVESTMENT PLAN

     90  

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

     91  

SENIOR SECURITIES

     95  

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     96  

DESCRIPTION OF OUR COMMON STOCK

     97  

PLAN OF DISTRIBUTION

     104  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR

     107  

LEGAL MATTERS

     107  

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     107  

AVAILABLE INFORMATION

     107  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  


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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the SEC utilizing a “shelf” registration process. Under this shelf registration process, the Selling Stockholders may sell the Secondary Shares. This prospectus and the documents we incorporate by reference into this prospectus provide you with a general description of the securities under this shelf registration statement. We may provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. You should read both this prospectus and any prospectus supplement together with the additional information described under the heading “Available Information” on page 107.

You should rely only on the information contained in this prospectus and any accompanying prospectus supplement. We and the Selling Stockholders have not authorized any other person to provide you with additional information, or with information different from that contained in this prospectus. If anyone provides you with different or additional information, you should not rely on it. We are not making offers to sell these securities in any jurisdiction where such offers or sales are not permitted. This prospectus and any accompanying prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate. You should assume that the information in this prospectus is accurate only as of the date on the front of this prospectus and the information in any accompanying prospectus supplement is accurate only as of the date on the front of the accompanying prospectus supplement. Our business, financial condition, results of operations and prospects may have changed since that date. We will update this prospectus to reflect material changes to the information contained herein. We encourage you to consult your own counsel, accountant and other advisors for legal, tax, business, financial and related advice regarding an investment in our securities.

The terms “we,” “us,” “our,” “the Company” and “GECC” in this prospectus refer to Great Elm Capital Corp., a Maryland corporation, and its subsidiaries for the periods after our consummation of the formation transaction (as described under “The Company—Formation Transactions,” the “Formation Transactions”) and the merger of Full Circle Capital Corporation with and into us. We maintain a website located at http://www.greatelmcc.com. Information on our website is not incorporated into or a part of this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you should consider. You are urged to carefully read this entire document including the more detailed information set forth under “Risk Factors” beginning on page 9.

The Company

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

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

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

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

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

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their net asset value. Our shares trade at a discount to our net asset value and further discounts will increase the risk of loss for purchasers in this offering.

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

The Selling Stockholders are permitted to sell the Secondary Shares below net asset value because they are not subject to the restrictions on selling common shares below net asset value applicable to the Company under the Investment Company Act. This may negatively affect the market price of our common stock.

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

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

We are and will remain an “emerging growth company” as defined in the JOBS Act until the earliest of (a) December 31, 2021, (b) the last day of the fiscal year (i) in which we have total annual gross revenue of at least $1.0 billion or (ii) in



 

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

Great Elm Capital Management, Inc.

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

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

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

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

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

 

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

 

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

 

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

These calculations are adjusted for any share issuances or repurchases during the quarter.

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



 

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

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

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

 

LOGO

Percentage of pre-incentive fee net investment income

allocated to income related portion of incentive fee

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

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

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

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

Investment Portfolio

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

 

Investment Type

   Cost      Fair Value  

1st Lien/Senior Secured Debt

   $ 198,652      $ 185,418  

Equity/Other

     50,805        13,971  
  

 

 

    

 

 

 

Total Long Term Investments

   $ 249,457      $ 199,389  
  

 

 

    

 

 

 


 

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LOGO

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

Risk Factors

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

As of June 30, 2018, Avanti is our largest investment (with a total exposure comprised of two different instruments), representing approximately 21% of our investment portfolio (excluding cash and short-term investments) and 40% of our total investment income for the six months ended June 30, 2018. In December 2017, we agreed to convert all accrued interest in the Avanti third lien senior secured notes (the “Existing Notes”) through March 31, 2018 into additional shares of Avanti common equity. As of March 31, 2018, we owned $54.1 million in principal amount of Existing Notes representing approximately 10% of our net asset value. The restructuring closed on April 26, 2018, and we now own approximately 9% of Avanti’s common shares. The conversion of our Existing Notes to Avanti common shares could result in a significant decrease in our net asset value if the market value of the Avanti common shares were to significantly decrease following the restructuring, a significant decrease in our total investment income and an increase in the risk of investing in our securities. These factors could also result in lower trading prices for our common stock and/or debt securities. Please see “Risk Factors—Risks Relating to Our Investments—We may lose all of our investment in Avanti.”

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

Conflicts of Interests

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

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



 

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

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

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

The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, we and GECM each have the right to terminate the agreement without penalty upon 60-days’ written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation. While any material change to the Investment Management Agreement must be submitted to our stockholders for approval under the Investment Company Act, we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement. For so long as MAST Funds and GEC collectively beneficially own 35% or more of our outstanding shares, the MAST Funds and GEC will vote on any proposed changes to the Investment Management Agreement in the same proportion as our unaffiliated stockholders.

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

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

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

This Offering

The Secondary Shares offered hereby were offered and sold in a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). We will not receive any proceeds from the sale of the Secondary Shares. See “Selling Stockholders” and “Plan of Distribution.”

Certain U.S. Federal Income Tax Considerations

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



 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear, directly or indirectly, based on the assumptions set forth below. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors will indirectly incur in connection with each offering pursuant to this prospectus. As a result, you are urged to read the “Fees and Expenses” table contained in any corresponding prospectus supplement to fully understand the actual transaction costs and expenses you will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to our fees or expenses, we will pay such fees and expenses out of our net assets and, consequently, stockholders will indirectly bear such fees or expenses as investors in the Company.

 

Stockholder Transaction Expenses:

  

Sales load (as a percentage of offering price)

             N/A (1)  

Offering expenses (as a percentage of offering price)

     N/A (2)  

Dividend reinvestment plan expenses

   $ 15.00 (3)  

Total Stockholder Transaction Expenses

     None  

Estimated Annual Expenses (as percentage of net assets attributable to common stock)

  

Base management fees

     2.26 %(4) 

Incentive fees payable under the Investment Management Agreement (20% of pre-incentive fee net income and capital gains)

     2.27 %(5) 

Interest payments on borrowed funds

     4.52 %(6) 

Acquired fund fees and expenses

     0.04 %(7) 

Other expenses

     2.45 %(8) 

Total annual expenses

     11.54 %(9) 

 

(1)

Any underwriting fee related to the Secondary Shares will be paid by the Selling Stockholders.

(2)

The related prospectus supplement, including each underwritten offering by the Selling Stockholders, will disclose the estimated amount of total offering expenses (which may include offering expenses borne by third parties on our behalf), the offering price and the offering expenses borne by us as a percentage of the offering price.

(3)

The expenses of the dividend reinvestment plan are included in “Other expenses.” The plan administrator’s fees will be paid by us. There will be no brokerage charges or other charges to stockholders who participate in the plan except that, if a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus $0.03 per share brokerage commission from the proceeds for open market purchases. For additional information, see “Dividend Reinvestment Plan.”

(4)

We are externally managed by GECM and our management fee will equal 1.50% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts and other forms of leverage). Consequently, if we have borrowings outstanding, the management fee as a percentage of net assets attributable to common shares would be higher than if we did not utilize leverage.

(5)

See “The Company—Investment Management Agreement.” The ratio of incentive fees payable under the Investment Management Agreement reflects a one-time reversal of certain incentive fees due to the uncertainty of income to be received as a result of the restructuring of our investment in Avanti, which is not expected to recur.

(6)

Assumes borrowings representing approximately 61% of our average net assets at an annual interest expense to us of 7.37%, which is based on the weighted average interest rate expensed on our outstanding 6.50% notes due 2022 (“2022 notes”) and 6.75% notes due 2025 (“2025 notes”), as adjusted for unamortized costs associated with each offering. At our 2018 annual meeting of stockholders (the “Annual Meeting”), a majority of our stockholders approved the application of the recently modified minimum asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act. As a result of such approval, the asset coverage ratio test applicable to us was decreased from 200% to 150%, allowing us to double the amount of our previously permitted leverage. See “Risk Factors—Risks Relating to Our Business and Structure—Recently enacted legislation permits us to incur additional debt.” We intend to deploy this leverage prudently, in amounts and at times that we believe can best deliver risk-adjusted returns to our stockholders. We are currently evaluating opportunities to deploy additional leverage, and may do so in the near term. The amount of leverage that we may employ at any particular time will depend on, among other things, our Board’s and GECM’s assessment of market and other factors at the time of any proposed borrowing. The following table, which is presented for illustration purposes only, shows our estimated annual expenses (as percentage of net assets attributable to common stock) assuming incurrence of the maximum amount of leverage as permitted under the 150% asset coverage ratio requirement.

 

Base management fees

     4.40

Incentive fees payable under the Investment Management Agreement (20% of pre-incentive fee net income and capital gains)

     2.27

Interest payments on borrowed funds(1)

     14.37

Acquired fund fees and expenses

     0.04

Other expenses

     2.45

Total annual expenses

     23.50

 

  (1)

Assumes borrowings representing approximately 200% of our average net assets at an annual interest expense to us of 7.37%, which is based on the weighted average interest rate expensed on our outstanding 2022 notes and 2025 notes, as adjusted for unamortized costs associated with each offering.

 

(7)

“Acquired fund fees and expenses” represents fees and expenses incurred directly by us as a result of investments in other investment companies including money market mutual funds.

(8)

“Other expenses” are based on estimated amounts for the current fiscal year.

(9)

“Total annual expenses” is different from the ratio of expenses to average net assets contained in the “Financial Highlights” included in our financial statements due to the fact that the “Financial Highlights” reflect only our operating expenses and do not include acquired fund fees and expenses.

 

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Example

The following example illustrates the projected dollar amount of total cumulative expenses that you would pay on a $1,000 hypothetical investment in our common stock, assuming (1) no sales load, (2) total annual expenses of 9.23% of net assets, excluding incentive fees, (first line) and total annual expenses of 10.23% of net assets, including incentive fees, (second line) attributable to common stock as set forth in the table above, and (3) a 5% annual return:

 

     1 Year      3 Years      5 Years      10 Years  

Total Expenses Incurred*

   $ 90      $ 260      $ 415      $ 750  

Total Expenses Incurred**

   $ 100      $ 284      $ 449      $ 792  

 

*

Assumes no incentive fees.

**

Assumes annual returns resulting entirely from net realized capital gains (and therefore subject to the capital gains incentive fee).

This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses may be greater or less than those assumed. The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. Assuming a 5% annual return, the incentive fee under the Investment Management Agreement would not be earned or payable and is not included in the first row of the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. The second row of the example therefore assumes the 5% return results entirely from net realized capital gains (and therefore is subject to the capital gains incentive fee) to demonstrate how the incentive fee could impact expenses. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by 95% of the market price per share of our common stock at the close of trading on the valuation date for the dividend. This applies where we are issuing new shares pursuant to our dividend reinvestment plan. We may also instruct the plan administrator to purchase shares of our common stock in the open market in connection with our implementation of the plan. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus $0.03 per share brokerage commission from the proceeds for open market purchases. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.

 

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SELECTED FINANCIAL DATA

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

 

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

Statement of Operations Data:

       

Total Investment Income

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

Total Gross Expenses

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

Total Net Expenses

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

Net Investment Income

    9,944       7,572       17,575       5  

Net Increase (Decrease) in Net Assets Resulting from Operations

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

Per Share Data(1):

       

Net Investment Income

    0.93       0.61       1.52       0.28 (2)  

Net Increase (Decrease) in Net Assets Resulting from Operations

    (0.13     0.07       (0.24     (0.75 )(2) 

Distributions Declared

    (0.50     (0.50     1.20       0.17 (2)  

Statement of Assets and Liabilities Data:

       

Total Assets

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

Total Liabilities

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

Total Net Assets

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

Other Data:

       

Per Share Market Value at the End of the Period

  $ 9.24     $ 10.62     $ 9.84     $ 11.67  

Total Return based on Market Value

    (1.03 )%(3)      (4.78 )%(3)      (5.56 )%(3)      (2.03 )%(4) 

Total Return based on Net Asset Value

    (1.04 )%(3)      1.98 %(3)      0.69 %(3)      (5.30 )%(4) 

 

(1)

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

(2)

For the period from November 3, 2016 to December 31, 2016. November 3, 2016 is the date on which the Merger closed; November 4, 2016 is the date on which we began operating as the combined entity resulting from the Merger.

(3)

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

(4)

Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. Total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming our distributions were reinvested through our dividend reinvestment plan, and is assumed to have been $12.03 per share on November 4, 2016. $12.03 per share represents the closing price of Full Circle’s common stock on its last day of trading prior to the Merger, as adjusted by the exchange ratio in the Merger Agreement (as defined herein).

 

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RISK FACTORS

Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus and any accompanying prospectus supplement, before you decide whether to make an investment in our securities. The risks set out below are the principal risks with respect to an investment in our securities generally and with respect to a BDC with investment objectives, investment policies, capital structures or trading markets similar to ours. However, they may not be the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Relating to Our Investments

We may lose all of our investment in Avanti.

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

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

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

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

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

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

On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to permit, among other things, the incurrence of up to $132.5 million in super senior indebtedness and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes, (2) offer to holders of Existing Notes the opportunity to purchase up to $132.5 million aggregate principal amount of the Avanti second lien senior secured notes (the “PIK Toggle Notes”) (the “New Money Offer”) and (3) offer to holders participating in the New Money Offer to exchange a portion of their Existing 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 had the ability to defer up to $112.0 million of future interest payments through April 2018.

 

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

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

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

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

 

   

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

 

   

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

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

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

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

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

 

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

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

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

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

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

For example, Avanti’s operations are regulated by various foreign governments and international bodies. These regulatory regimes restrict or impose conditions on Avanti’s ability to operate in designated areas and to provide specified products or services. In addition, new laws or regulations or changes to the existing regulatory framework

 

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could impose additional costs, impair revenue opportunities and potentially impede Avanti’s ability to provide services. The further regulation of Avanti’s activities could impact Avanti’s ability to compete in the marketplace and limit the return Avanti, and, as a result, we, can expect to achieve.

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

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

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

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

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

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

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

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

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

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

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

We generally do not hold controlling equity positions in our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or

 

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stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments if we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.

Defaults by our portfolio companies may harm our operating results.

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

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

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

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

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

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

Our portfolio consists primarily of debt and equity investments in privately owned lower middle-market companies. Investing in lower middle-market companies involves a number of significant risks. Typically, the debt instruments in which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be below investment grade, which are referred to as “junk bonds.” Compared to larger publicly owned companies, these middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic downturns and other business disruptions. Typically, these companies need more capital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face intense competition from larger companies with greater financial, technical and marketing resources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons. Therefore, the loss of any of their key employees could affect a portfolio 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.

 

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

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

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

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

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

 

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prior to permitting the portfolio company to borrow. Typically the intercreditor agreements expressly subordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings; (3) the amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans and notes.

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

Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (the “BBA”) in connection with the calculation of the London Interbank Offered Rate (“LIBOR”) across a range of maturities and currencies may have been underreporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

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

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

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

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

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

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

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

We may not realize gains from our equity investments.

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

 

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

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

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

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

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

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

 

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

 

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

 

    when GECM is otherwise unable to locate attractive investment opportunities;

 

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

 

    to meet RIC qualification requirements.

We may also be required to hold higher levels of cash, money market mutual funds or other short-term securities in order to pay our expenses or make distributions to stockholders in the ordinary course of business given the relatively high percentage of our total investment income represented by PIK income. During periods when we maintain exposure to cash, money market mutual funds or short-term securities, we may not participate in market movements to the same extent that it would if we were fully invested, which may have a negative impact on our business and operations and, accordingly, our returns may be reduced.

Risks Relating to Our Business and Structure

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

GEC and the MAST Funds collectively own the majority of the outstanding shares of our common stock and accordingly may control the results of matters submitted to the vote of our stockholders. GEC and the MAST Funds agreed to vote their shares proportionately to our other stockholders on certain matters until they collectively own less than 35% of the outstanding shares of our common stock. Although there is no agreement between GEC and the MAST Funds to act in concert with respect to the shares of our common stock they own, funds managed by MAST

 

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Capital (including some of the MAST Funds) are a significant stockholder of GEC and Peter A. Reed, our Chief Executive Officer, is Chief Executive Officer and a member of the board of directors of GEC. GEC and the MAST Funds may use their share ownership, ownership of GECM or otherwise exert control over us in a manner that is adverse to your interests.

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

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

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

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

You may not receive distributions or our distributions may not grow over time.

We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-over-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See “The Company—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 have existing indebtedness and may in the future borrow additional money, each of which magnifies the potential for loss on amounts invested and may increase the risk of investing with us. Our ability to service our existing and potential future debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we could employ at any particular time will depend on GECM’s and our Board’s assessment of market and other factors at the time of any proposed borrowing.

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

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

 

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

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

Table 1

 

Assumed Return on Our Portfolio (net of expenses)

     (10.00 )%      (5.00 )%      0.00     5.00     10.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

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

Table 2

 

Assumed Return on Our Portfolio (net of expenses)

     (10.00 )%      (5.00 )%      0.00     5.00     10.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

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

We may experience fluctuations in our quarterly results.

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

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

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

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

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

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

In addition, with certain limited exceptions, we are only allowed to borrow or issue debt securities or preferred stock such that our asset coverage, as defined in the Investment Company Act, equals at least 150% immediately after such borrowing, which, in certain circumstances, may restrict our ability to borrow or issue debt securities or preferred stock.

 

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The amount of leverage that we may employ will depend on GECM’s and our Board’s assessments of market and other factors at the time of any proposed borrowing or issuance of debt securities or preferred stock. We cannot assure you that we will be able to obtain lines of credit at all or on terms acceptable to us.

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

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

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

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

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

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

In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities. It is unclear what effect, if any, the conclusion of the Federal Reserve’s bond-buying program has had or will have on the value of our investments. However, it is possible that, without quantitative easing by the Federal Reserve, these developments, along with the United States government’s credit and deficit concerns and the European sovereign debt crisis, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. The target range for the federal funds rate may increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In June 2017, the Federal Reserve raised the target range for the federal funds rate, which was only the fourth such interest rate hike in nearly a decade.

In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from a continued sell-off of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued 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.

 

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

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

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

Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including new tax rates, immediate expensing of certain capital expenses and significant limitations on deductibility of interest. This legislation could have significant effects on us and on an investment in our shares, some of which may be adverse. The magnitude of the net impact remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the Internal Revenue Service (the “IRS”).

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

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

 

    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;

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

Our common stock price may be volatile and may decrease substantially, and you may lose money in connection with an investment in our shares.

The trading price of our common stock will likely fluctuate substantially. The price of our common stock may increase or decrease, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

 

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

 

    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 securities. However, the effects might be adverse, which could negatively impact our ability to pay our stockholders dividends or other distributions and cause you to lose all or part of your investment.

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

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

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

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

 

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

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

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

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

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

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

We may choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

We may distribute a portion of our taxable distributions in the form of shares of our stock. Under applicable provisions of the Code, distributions payable in cash or in shares of stock at the election of stockholders may be treated as a taxable distribution. The IRS has issued guidance stating that this rule will apply even if the total amount of cash that may be distributed is limited to no more than 20% of the total distribution and certain other conditions are met. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, taxable stockholders receiving such distribution will be required to include the full amount of the distribution (whether received in cash, stock or a combination thereof) as ordinary income (or as a long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such distribution in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect to all or a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock, in order to pay taxes owed on distribution, such sales may put downward pressure on the trading price of our common stock.

 

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

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

Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, the Dodd-Frank Act and other rules implemented by our government.

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

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

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

Recently enacted legislation permits us to incur additional debt.

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

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

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

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

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

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

 

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

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

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

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

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

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

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

The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are subjective and dependent on a valuation process approved and overseen by our Board. Factors that may be considered in determining the fair value of our investments include, among others, estimates of the collectability of the principal and interest on our debt investments and expected realization on our equity investments, as well as external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies and small cap public companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ

 

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materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially misstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our securities based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling securities during a period in which the net asset value understates the value of our investments will receive a lower price for their securities than the value of our investments might otherwise warrant.

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

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

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

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

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

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

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

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

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

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

Provisions of the Maryland General Corporation Law and our organizational documents could deter takeover attempts and have an adverse impact on the prices of our common stock.

The Maryland General Corporation Law and our organizational documents contain provisions that may discourage, delay or make more difficult a change in control of GECC or the removal of our directors. We are subject to the

 

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Maryland Business Combination Act and the Investment Company Act. If our Board does not approve a business combination, the Maryland Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our Board could amend our bylaws to repeal our current exemption from the Control Share Acquisition Act; however, our Board will not amend our bylaws to repeal the current exemption from the Control Share Acquisition Act without a formal determination by the Board that doing so would be in the best interests of our stockholders and without first notifying the SEC staff. The Control Share Acquisition Act also may make it more difficult for a third party to obtain control of GECC and increase the difficulty of consummating such a transaction.

Our Board is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

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

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

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

While senior members of GECM’s investment team have significant experience investing in debt securities of middle-market companies, GECM is a new entity and has limited investment advisory experience managing a BDC. Therefore, GECM may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in our 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 with limited operating history, and GECM has no prior experience managing a BDC.

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

We have a limited operating history on which you can evaluate an investment in us or our prior performance. The results of any other funds or clients managed by affiliates of GECM, which have or have had an investment program that is

 

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

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

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

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

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

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

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

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

 

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majority of our directors who are not interested persons. However, both we and GECM have the right to terminate the agreement without penalty upon 60 days’ written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation.

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

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

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

Shares of closed-end investment companies, including BDCs, frequently trade at a discount from their net asset value.

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

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

You may not receive distributions or our distributions may not grow over time and a portion of our distributions may be a return of capital.

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

When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. Stockholders who periodically receive the payment of a distribution consisting of a return of capital may be under the impression that they are receiving net profits when they are not. Stockholders should not assume that the source of a distribution from us is net profit.

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

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

 

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

Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.

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

Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.

The Investment Company Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain exceptions. Our shares might trade at premiums that are unsustainable or at discounts from net asset value.

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

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

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

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

 

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

 

    the return or impact of current and future investments;

 

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

 

    the impact of fluctuations in interest rates on our business;

 

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

 

    our contractual arrangements and relationships with third parties;

 

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

 

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

 

    our expected financings and investments;

 

    the adequacy of our financing resources and working capital;

 

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

 

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

 

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

 

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

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

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

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

 

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USE OF PROCEEDS

All of the Secondary Shares offered by the Selling Stockholders pursuant to this prospectus will be sold by the Selling Stockholders for their own account. We will not receive any of the proceeds from these sales. The Selling Stockholders have or will pay all fees and expenses incurred in connection with the registration and offering of the Secondary Shares pursuant to the Registration Rights Agreement, including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses of counsel, independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes. The Selling Stockholders have reimbursed us for approximately $762,643 for fees and expenses invoiced to date in connection with the registration and disposition of the Secondary Shares. We have incurred, and estimate that we will incur, an additional $305,000 of fees and expenses for a total of approximately $1,072,790 of fees and expenses, all of which are required to be reimbursed by the Selling Stockholders under the Registration Rights Agreement.

 

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SELLING STOCKHOLDERS

This prospectus relates to the possible resale of up to 7,000,268 shares of our common stock that are currently issued and outstanding. All of such Secondary Shares are held by the Selling Stockholders as noted in the table and footnotes below. The Selling Stockholders acquired their shares from us in connection with our Formation Transactions. In connection with the Formation Transactions, we entered into the Registration Rights Agreement pursuant to which we granted these holders registration rights.

The following table sets forth:

 

   

the name of the Selling Stockholders;

 

   

the number and percent of shares of our common stock that each Selling Stockholder beneficially owned prior to the offering for resale of the Secondary Shares under this prospectus;

 

   

the number of Secondary Shares that may be offered for resale for the account of each Selling Stockholder under this prospectus, some or all of which Secondary Shares may be sold pursuant to this prospectus and any prospectus supplement; and

 

   

the number and percent of shares of our common stock to be beneficially owned by each Selling Stockholder after an offering under this prospectus (assuming all of the offered Secondary Shares are sold by each Selling Stockholder).

The number of shares in the column “Number of Shares Being Offered” represents all of the Secondary Shares that such Selling Stockholder may offer under this prospectus. We do not know how long each of the Selling Stockholders will hold the Secondary Shares before selling them or how many Secondary Shares it will sell and we currently have no agreements, arrangements or understandings with any of the Selling Stockholders regarding the sale of any of the Secondary Shares under this registration statement. The Secondary Shares offered by this prospectus may be offered from time to time by the applicable Selling Stockholder listed below.

This table is prepared solely based on information supplied to us by the listed Selling Stockholder and any public documents filed with the SEC, and assumes the sale of all of the Secondary Shares. The applicable percentages of beneficial ownership are based on an aggregate of 10,652,401 shares of our common stock issued and outstanding on August 21, 2018, adjusted as may be required by rules promulgated by the SEC.

 

Stockholder

   Shares Beneficially Owned
Prior to Offering
    Number of
Shares Being
Offered
     Shares Beneficially Owned
After  Offering
 
   Number      Percent      Number      Percent  

Great Elm Capital Group, Inc.(1)

     1,966,667        18.46     1,966,667        —          —    

MAST Credit Opportunities I Master Fund Limited(2)

     2,297,018        21.56     2,297,018        —          —    

MAST Select Opportunities Master Fund, L.P.(2)

     2,566,592        24.09     2,566,592        —          —    

MAST Admiral Master Fund, L.P.(2)

     155,905        1.46     155,905        —          —    

MAST Select Opportunities, L.P.(2)

     14,086        0.13     14,086        —          —    

 

(1)

An affiliate of our investment adviser, GECM.

(2)

Each are private funds managed by MAST Capital.

Shares of our common stock sold by any of the Selling Stockholders will generally be freely tradable. Sales of substantial amounts of our common stock, including by the Selling Stockholders, or the availability of such common stock for sale, whether or not sold, could adversely affect the prevailing market prices for our common stock.

Registration Rights

We entered into the Registration Rights Agreement with GEC, MAST Credit Opportunities I Master Fund Limited, MAST Admiral Master Fund, L.P. and MAST Select Opportunities Master Fund, L.P., pursuant to which we granted these holders (the “Holders”) certain registration rights.

 

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The Selling Stockholders have or will pay all fees and expenses incurred in connection with the registration and offering of the Secondary Shares pursuant to the Registration Rights Agreement, including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses of counsel, independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes.

Shelf Registration Statement

We agreed to file a shelf registration statement on Form N-2 under the Securities Act providing for a public offering of all of the registerable securities held by the Holders (the “Mandatory Registration”), which was required to be a “shelf” registration pursuant to Rule 415 under the Securities Act if the Company was eligible to do so. The filing was to happen as promptly as practicable on or after the date of the Subscription Agreement (as defined herein), but in no event later than 60 days following the closing under the Subscription Agreement.

Demand Registration

Commencing on the first anniversary of the filing of the registration statement for the Mandatory Registration, a majority of Holders of registration rights have the right to require us to file a registration statement on Form N-2 for a public offering of all or part of the registrable securities held by such Holders (a “Demand Registration). Each such request shall specify the aggregate number of registrable securities proposed to be sold and we agreed to file the registration statement in respect of such demand within 45 days after receiving the demand request, but we are not obligated to cause a registration statement with respect to such demand to be declared effective within 90 days after the effective date of a previous Demand Registration.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

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

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

Beginning with our tax year starting October 1, 2016, we elected to be treated as a RIC for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify for tax treatment as a RIC, we must, among other things, meet source-of-income and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our investment company taxable income on a timely basis. If we qualify for tax treatment as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.

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

Formation Transactions

On June 23, 2016, we entered into a subscription agreement with GEC and the MAST Funds, dated as of June 23, 2016 (the “Subscription Agreement”), under which:

 

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

 

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

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

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

Following the closing of the Merger, we entered into the Registration Rights Agreement with GEC and the MAST Funds.

Full Circle Merger

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

 

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

 

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

 

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

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

 

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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 to middle-market companies from other sources, the level of merger and acquisition activity, pricing in the high yield credit markets, our expectations of future investment opportunities, the general economic environment and the competitive environment for the types of investments we make.

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

Revenues

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

Expenses

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

Critical Accounting Policies

Valuation of Portfolio Investments

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

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

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

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

 

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

All Level 3 investments that comprise more than 5% of the investments of GECC are valued by independent third parties.

Revenue Recognition

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

 

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

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the first in first out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment fair value and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Portfolio and Investment Activity

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

 

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

End of  Period(3)
 

Formation Transactions

   $ 90,494      $ —       

Merger

     74,658        —       

November 4, 2016 through December 31, 2016

     42,006        (41,738      10.00
  

 

 

    

 

 

    

For the period ended December 31, 2016

     207,158        (41,738   

Quarter ended March 31, 2017

     75,852        (78,758      9.87

Quarter ended June 30, 2017

     21,395        (37,570      9.59

Quarter ended September 30, 2017

     49,467        (18,884      9.62

Quarter ended December 31, 2017

     53,163        (39,772      11.17
  

 

 

    

 

 

    

For the year ended December 31, 2017

     199,877        (174,984   
  

 

 

    

 

 

    

Quarter ended March 31, 2018

     63,220        (29,069      11.05
  

 

 

    

 

 

    

Quarter ended June 30, 2018

     37,927        (27,729      9.94
  

 

 

    

 

 

    

For the period ended June 30, 2018

     101,147        (56,798   
  

 

 

    

 

 

    

Since inception

   $ 508,182      $ (273,520   
  

 

 

    

 

 

    

 

(1)

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

(2)

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

(3)

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

 

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Portfolio Reconciliation

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

 

     For the six
months ended
June 30, 2018
     For the year
ended

December  31,
2017
     For the period from
inception  through
December 31, 2016
 

Beginning Investment Portfolio

   $ 164,870      $ 154,677      $ —    

Portfolio Investments acquired via the Formation Transactions and the Merger

     —          —          165,152  

Portfolio Investments acquired(1)

     101,147        199,878        42,006  

Amortization of premium and accretion of discount, net

     1,409        5,627        2,438  

Portfolio Investments repaid or sold(2)

     (56,798      (174,983      (41,738

Net change in unrealized appreciation (depreciation) on investments

     (12,456      (23,962      (13,455

Net realized gain (loss) on investments

     1,131        3,633        274  
  

 

 

    

 

 

    

 

 

 

Ending Investment Portfolio

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

 

 

    

 

 

    

 

 

 

 

(1)

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

(2)

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

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

Portfolio Classifications

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

 

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

Investments:

          

Debt Instruments

   $ 185,418        93.0   $ 164,521        99.8

Equity Investments

     13,971        7.0     349        0.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments at Fair Value

   $ 199,389        100.0   $ 164,870        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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

 

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

Wireless Telecommunications Services

   $ 47,226        35.9

Building Cleaning and Maintenance Services

     17,493        13.3

Metals & Mining

     12,655        9.6

Radio Broadcasting

     9,133        6.9

Wireless Communications

     8,950        6.8

Industrial Other

     8,080        6.1

Real Estate Services

     7,316        5.6

Consumer Discretionary

     7,236        5.5

Information and Data Services

     4,467        3.4

Consumer Finance

     3,071        2.3

Maritime Security Services

     2,220        1.7

Water Transport

     1,737        1.3

Hotel Operator

     1,306        1.0

Internet Advertising

     666        0.5

Grain Mill Products

     74        0.1

Energy Efficiency Services

     -        0.0
  

 

 

    

 

 

 

Total

   $ 131,630        100.0
  

 

 

    

 

 

 

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

 

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

Wireless Telecommunication Services

   $ 41,950        33.40

Building Cleaning and Maintenance Services

     18,766        14.94

Manufacturing

     16,450        13.10

Industrial Conglomerates

     14,138        11.26

Retail

     13,685        10.90

Software Services

     13,646        10.87

Technology Services

     13,306        10.59

Gaming, Lodging & Restaurants

     9,801        7.80

Chemicals

     9,571        7.62

Radio Broadcasting

     8,869        7.06

Real Estate Services

     7,291        5.81

Business Services

     7,291        5.81

Water Transport

     6,206        4.94

Information and Data Services

     4,841        3.85

Oil, Gas & Coal

     4,611        3.67

Industrial Other

     3,316        2.64

Hotel Operator

     2,574        2.05

Consumer Finance

     2,448        1.95

Wireless Communications

     272        0.22

Grain Mill Products

     237        0.19

Maritime Security Services

     34        0.03

Short-Term Investments

     79,190        63.05
  

 

 

    

 

 

 

Total

   $ 278,493        221.75
  

 

 

    

 

 

 

 

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Results of Operations

Total Investment Income

 

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

Total Investment Income

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

Interest income

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

Dividend income

     49        0.00        85        0.01        155        0.01        131        0.01  

Other income

     131        0.01        14        0.00        158        0.01        457        0.04  

 

(1)

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

(2)

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

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

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

 

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Period Ended December 31, 2016

 

     In Thousands      Per Share(1)  

Total Investment Income(2)

   $ 5,831      $ 0.45  

Interest Income

     5,313        0.41  

Other Income

     518        0.04  

Net Operating Expenses

     5,826        0.45  

Management Fee

     392        0.03  

Incentive Fee

     863        0.07  
  

 

 

    

 

 

 

Total Advisory Fees

     1,255        0.10  

Total Costs Incurred Under Administration

Agreement

     224        0.02  

Directors’ Fees

     38        0.00  

Interest Expenses

     420        0.03  

Professional Services Expense

     186        0.01  

Professional Services Expense related to the Merger and Formation transactions

     3,471        0.27  

Bank Fees

     10        0.00  

Other

     214        0.02  

Income tax expense, including excise tax

     88        0.01  

Fees Waivers and Expense Reimbursement

     80        0.01  
  

 

 

    

 

 

 

Net Investment Income

   $ 5      $ 0.00  
  

 

 

    

 

 

 

 

(1)

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

(2)

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

Year Ended December 31, 2017

 

     In Thousands      Per Share(1)  

Total Investment Income(2)

   $ 29,728      $ 2.55  

Interest Income

     28,924        2.48  

Dividend Income

     298        0.03  

Other Income

     506        0.04  

Net Operating Expenses

     12,153        1.03  

Management fees

     2,298        0.20  

Incentive fees

     4,394        0.38  
  

 

 

    

 

 

 

Total Investment Management Fees

     6,692        0.57  

Administration fees

     1,362        0.12  

Directors’ fees

     136        0.01  

Interest expense

     2,039        0.17  

Professional services

     1,013        0.09  

Custody Fees

     62        0.01  

Other

     655        0.06  

Income Taxes

     124        0.01  

Fees Waivers and Expense Reimbursement

     (70      (0.01
  

 

 

    

 

 

 

Net Investment Income

   $ 17,575      $ 1.52  
  

 

 

    

 

 

 

 

(1)

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

(2)

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

 

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Period Ended December 31, 2016

 

     In Thousands      Per Share(1)  

Total Investment Income(2)

   $ 5,831      $ 0.45  

Interest Income

     5,313        0.41  

Other Income

     518        0.04  

 

(1)

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

(2)

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

Total Investment Income for the period from inception through December 31, 2016 was $5,831, which included $5,313 of interest income. Interest income included non-cash income of $2,438, which includes net accretion of OID and market discount. Of the accretion of OID and market discount, $1,374 was associated with our investment in Optima Specialty Steel which matured in December 2016.

We also generated $518 of fee income. Fee income was largely comprised of amendment fees on our loans to RiceBran Technologies Inc. and Pristine Environments, LLC.

Year Ended December 31, 2017

For the year ended December 31, 2017:

 

     In Thousands      Per Share (1)  

Total Investment Income(2)

   $ 29,728      $ 2.55  

Interest Income

     28,924        2.48  

Dividend Income

     298        0.03  

Other Income

     506        0.04  

 

(1)

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

(2)

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

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

 

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

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

Expenses

 

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

Net Operating Expenses

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

Management fees

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

Incentive fees

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

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total advisory fees

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

Administration fees

     487       0.05       272        0.02        797       0.07       767        0.06  

Directors’ fees

     50       0.00       21        0.00        99       0.01       48        0.00  

Interest expense

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

Professional services

     294       0.03       176        0.01        465       0.04       507        0.04  

Custody fees

     15       0.00       11        0.00        29       0.00       24        0.00  

Other

     177       0.02       156        0.01        331       0.03       269        0.02  

Fee Waivers and Expense Reimbursement

     —         —         75        0.01        —         —         70        0.01  

 

(1)

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

(2)

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

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

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

 

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Table of Contents

Period Ended December 31, 2016

 

     In Thousands      Per Share(1)  

Net Operating Expenses

   $ 5,826      $ 0.45  

Management Fee

     392        0.03  

Incentive Fee

     863        0.07  
  

 

 

    

 

 

 

Total Advisory Fees

     1,255        0.10  

Total Costs Incurred Under Administration

Agreement

     224        0.02  

Directors’ Fees

     38        0.00  

Interest Expenses

     420        0.03  

Professional Services Expense

     186        0.01  

Professional Services Expense related to the Merger and Formation transactions

     3,471        0.27  

Bank Fees

     10        0.00  

Other

     214        0.02  

Income tax expense, including excise tax

     88        0.01  

Fees Waivers and Expense Reimbursement

     80        0.01  

 

(1)

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

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

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

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

Interest expense for the period was $420.

Year Ended December 31, 2017

 

     In Thousands      Per Share(1)  

Net Operating Expenses

   $ 12,153      $ 1.03  

Management fees

     2,298        0.20  

Incentive fees

     4,394        0.38  
  

 

 

    

 

 

 

Total Investment Management Fees

     6,692        0.57  

Administration fees

     1,362        0.12  

Directors’ fees

     136        0.01  

Interest expense

     2,039        0.17  

Professional services

     1,013        0.09  

Custody Fees

     62        0.01  

Other

     655        0.06  

Income Taxes

     124        0.01  

Fees Waivers and Expense Reimbursement

     (70      (0.01

 

(1)

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

 

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Table of Contents

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

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

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

Interest expense for the year was $2,039.

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

Net Investment Income

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

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

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

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

Net Realized Gains (Losses) on Investments

During the three months ended March 31, 2017, we recorded net realized gains of $1,980, primarily in connection with our disposition of our investment in JN Medical, which resulted in a $1,007 gain. We also realized gains of $281 on the sale of our Trilogy International bonds and $354 on the sale of a portion of our Everi Payments bonds.

 

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

Total Realized Gains

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

 

(1)

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

(2)

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

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

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

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

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

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

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Table of Contents

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

 

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

Portfolio Company

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

Avanti Communications
Group plc

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

OPS Acquisitions Limited and
Ocean Protection Services Limited

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

PE Facility Solutions, LLC

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

Sonifi Solutions, Inc.

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

Other(1)

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Totals

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

Other represents all remaining investments.

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

 

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

Portfolio Company

   Change in
Unrealized

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

Avanti Communications
Group plc(1)

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

OPS Acquisitions Limited and Ocean Protection Services Limited

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

Tru Taj, LLC

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

Other(2)

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Totals

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

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

(2)

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

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

Liquidity and Capital Resources

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

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

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

For the six months ended June 30, 2018, net cash used for operating activities, consisting primarily of net purchases of investments and the items described in “—Results of Operations,” was approximately $(35,986), reflecting the purchases and repayments of investments, net investment income resulting from operations, offset by non-cash income related to OID and PIK income, changes in working capital and accrued interest receivable. Net cash used for purchases and sales of investments was approximately $(36,314), reflecting principal repayments and sales of $56,798, offset by additional investments of $(93,112). Such amounts included draws and repayments on revolving credit facilities. Our Board previously set our distribution rate at $0.083 per share per month and we intend to re-evaluate our dividend rate from time to time.

 

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Contractual Obligations

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

 

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

2022 Notes

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

2025 Notes

     46,398                 46,398  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

Stock Buyback Program

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

Inflation

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

Off-Balance Sheet Arrangements

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

 

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Table of Contents

Notes Payable

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

On September 18, 2017, we sold $28,375 in aggregate principal amount of 6.50% notes due 2022. On September 29, 2017, we sold an additional $4,256 of the 2022 notes upon full exercise of the underwriters’ over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2022 notes outstanding is $32,631.

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

On January 11, 2018, we sold $43,000 in aggregate principal amount of 6.75% notes due 2025. On January 19, 2018 and February 9, 2018, we sold an additional $1,898 and $1,500 of the 2025 notes upon partial exercise of the underwriters’ over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2025 notes outstanding is $46,398.

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

Recent Developments

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

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

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

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

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

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

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

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

 

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

 

Month

   Rate      Record Date    Payable Date

October

   $ 0.083      October 31, 2018    November 15, 2018

November

   $ 0.083      November 30, 2018    December 14, 2018

December

   $ 0.083      December 31, 2018    January 15, 2019

Reduction in Required Minimum Asset Coverage Ratio

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

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

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

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

 

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Table of Contents

THE COMPANY

Overview

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

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

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

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

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

Our Portfolio at June 30, 2018

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

 

Portfolio Company  

Security

 

Industry

 

Interest (1)

 

% of
Class

 

Maturity

  Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 

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

                 

Controlled Investments - 16.25% of Net Assets(3)

                 
                 

PE Facility Solutions, LLC

  1st Lien, Senior Secured
Revolver(5),(15)
 

Building Cleaning and Maintenance Services

  11.09%
(L + 9.00%) (6)
    02/27/2022     3,679     $ 3,679     $ 3,679       2.93

San Diego, CA

  1st Lien, Senior Secured Revolver - Unfunded(5),(15)     11.09%
(L + 9.00%) (6)
    02/27/2022     2,321       —         —         —  
  1st Lien, Senior Secured
Loan A(5),(15)
    13.09%
(L + 11.00%) (6)
    02/27/2022     9,900       9,900       9,900       7.88
  1st Lien, Senior Secured
Loan B(5),(15)
    16.09%
(L + 14.00%) (6),(7)
    02/27/2022     6,171       5,897       5,187       4.13
  Common
Equity(5),(8),(15)
      83%       1       —         —         —  
             

 

 

   

 

 

   

 

 

 
                19,476       18,766       14.94
             

 

 

   

 

 

   

 

 

 

 

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Portfolio Company  

Security

 

Industry

 

Interest (1)

 

% of
Class

 

Maturity

  Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 

The Finance Company

  1st Lien, Senior Secured
Revolver(5)
 

Consumer Finance

  13.09% (L + 11.00%, 11.50% Floor)(6)     07/02/2020     535       535       535       0.43

Silver Springs, MD

  1st Lien, Senior Secured Unfunded Loan(5)     13.09% (L + 11.00%, 11.50% Floor)(6)     07/02/2020     465       —         —         —  
  2nd Lien Secured Term Loan B(5)     13.09% (L + 11.00%, 11.50% Floor)(6)     07/02/2020     1,491       1,491       1,108       0.88
  Equity(5),(8)       72%       288,000       —         —         —  
             

 

 

   

 

 

   

 

 

 
                2,206       1,643       1.31
             

 

 

   

 

 

   

 

 

 

Total Controlled Investments

                21,502       20,409       16.25 % 
             

 

 

   

 

 

   

 

 

 

Affiliate Investments - 33.43% of Net Assets(4)

                 

Avanti Communications Group PLC

  2nd Lien, Senior Secured
Bond(10),(11)
 

Wireless Telecommunications Services

  9.00%     10/01/2022     37,126       32,800       28,216       22.47

London, UK

  Common
Equity(8),(10)
      9%       196,086,410       50,660       13,734       10.93
             

 

 

   

 

 

   

 

 

 
                83,460       41,950       33.40
             

 

 

   

 

 

   

 

 

 
                 

OPS Acquisitions Limited and Ocean Protection Services Limited

  1st Lien, Senior Secured
Loan(5),(10),(16)
 

Maritime Security Services

  14.09% (L + 12.00%, 12.50% Floor)(6),(9)     06/01/2018     4,903       4,240       34       0.03

London, UK

  Common
Equity(5),(8),(10),(16)
      19%       19       —         —         —  
             

 

 

   

 

 

   

 

 

 
                4,240       34       0.03
             

 

 

   

 

 

   

 

 

 

Total Affiliate Investments

                87,700       41,984       33.43 % 
             

 

 

   

 

 

   

 

 

 

Non-Control, Non-Affiliate Investments- 109.01% of Net Assets

                 

Almonde, Inc. Philadelphia, PA

  2nd Lien, Senior Secured
Loan(10),(17)
 

Software Services

  9.59% (L + 7.25%, 8.25% floor)(13)     06/13/2025     10,000       9,953       9,616       7.66

Aptean Holdings, Inc. Alpharetta, GA

  2nd Lien, Senior Secured
Loan(5),(29)
 

Software Services

  11.84% (L + 9.50%, 10.50% Floor)(13)     12/02/2023     4,010       4,054       4,030       3.21

Commercial Barge Line Company Jeffersonville, IN

  1st Lien, Senior Secured Loan(18)  

Water Transport

  10.84% (L + 8.75%, 9.75% Floor)(6)     11/12/2020     9,000       7,544       6,206       4.94

Davidzon Radio, Inc. Brooklyn, NY

  1st Lien, Senior Secured Loan(5),(16)  

Radio Broadcasting

  15.09% (L + 10.00%, 11.00% Floor)(6),(12)     03/31/2020     9,471       9,047       8,869       7.06

Foresight Energy LP Saint Louis, MO

  1st Lien, Senior Secured Loan(27)  

Oil, Gas & Coal

  8.09% (L + 5.75%, 6.75% floor)(13)     03/28/2022     4,647       4,594       4,611       3.67

Full House Resorts, Inc. Las Vegas, NV

  1st Lien Senior Secured
Note(5),(25)
 

Gaming, Lodging & Restaurants

  9.34% (L + 7.00%, 8.00% floor)(13)     02/02/2024     9,950       9,761       9,801       7.80

Geo Specialty Chemicals, Inc. Lafayette, Indiana

  1st Lien, Senior Secured
Revolver(5),(19)
 

Chemicals

  6.84% (L + 4.75%, 5.75% Floor)(6)     04/30/2019     3,938       3,804       3,833       3.05
  1st Lien, Senior Secured Revolver - Unfunded(5),(19)     6.84% (L + 4.75%, 5.75% Floor)(6)     04/30/2019     438       —         (12     (0.01 )% 
  1st Lien, Senior Secured
Loan(5),(19)
    6.84% (L + 4.75%, 5.75% Floor)(6)     04/30/2019     5,906       5,726       5,750       4.58
             

 

 

   

 

 

   

 

 

 
                9,530       9,571       7.62
             

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Portfolio Company  

Security

 

Industry

 

Interest (1)

 

% of
Class

 

Maturity

  Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 

International Wire Group Inc Camden, NY

  2nd Lien, Senior Secured Bond(11)  

Manufacturing

  10.75%     08/01/2021     17,500       16,476       16,450       13.10

Luling Lodging, LLC Luling, TX

  1st Lien, Senior Secured
Loan(5),(16)
 

Hotel Operator

  19.09% (L + 12.00%, 12.25% Floor)(6),(9),(12)     12/18/2017     2,715       1,300       2,574       2.05

Michael Baker International, LLC Pittsburgh, PA

  2nd Lien, Senior Secured Bond(11)  

Industrial Conglomerates

  8.75%     03/01/2023     14,500       14,044       14,138       11.26

NANA Development Corp. Anchorage, AK

  1st Lien, Senior Secured Bond(11)  

Industrial Other

  9.50%     03/15/2019     3,308       3,284       3,316       2.64

PEAKS Trust 2009-1 Carmel, IN

  1st Lien, Senior Secured
Loan(5),(10),(16)
 

Consumer Finance

  7.59% (L + 5.50%, 7.50% Floor)(6)     01/27/2020     1,242       942       805       0.64

PR Wireless, Inc.

  1st Lien, Senior Secured Delayed Draw Loan(5),(20)  

Wireless Communications

  7.59% (L + 5.25%)(13)     06/29/2020     274       274       275       0.22

Guaynabo, PR

  1st Lien, Senior Secured Unfunded Delayed Draw Loan(5),(20)     7.59% (L + 5.25%)(13)     06/29/2020     1,098       —         (3     (0.0 )% 
             

 

 

   

 

 

   

 

 

 
                274       272       0.22
             

 

 

   

 

 

   

 

 

 

RiceBran Technologies Corporation Scottsdale, AZ

  Warrants(5),(8),(16)  

Grain Mill Products

  $1.60 Strike Price     05/12/2020     300,000       145       237       0.19

SESAC Holdco II LLC Nashville, TN

  2nd Lien, Senior Secured Loan(5),(21)  

Business Services

  9.34% (L + 7.25%)(6)     02/24/2025     7,295       7,244       7,291       5.81

Sungard Availability Services Capital, Inc.

  1st Lien, Senior Secured Loan(22)  

Technology Services

  12.09% (L + 10.00%, 11.00% Floor)(6)     10/01/2022     8,880       8,565       8,729       6.95

Wayne, PA

  1st Lien, Senior Secured
Loan(5),(24)
    9.09% (L + 7.00%, 8.00% Floor)(6)     9/30/2021     4,900       4,565       4,577       3.64
             

 

 

   

 

 

   

 

 

 
                13,130       13,306       10.59
             

 

 

   

 

 

   

 

 

 

Tallage Davis, LLC

  1st Lien, Senior Secured
Loan(5),(26)
 

Real Estate Services

  11.00%     01/25/2023     3,100       3,100       3,083       2.45

Boston, MA

  1st Lien, Senior Secured Loan – Unfunded(5),(26)     11.00%     01/26/2023     11,000       —         (61     (0.05 )% 
             

 

 

   

 

 

   

 

 

 
                3,100       3,022       2.40
             

 

 

   

 

 

   

 

 

 

Tallage Lincoln, LLC

  1st Lien, Senior Secured
Loan(5),(16)
 

Real Estate Services

  12.34% (L + 10.00%, 11.00% Floor)(13)     12/31/2019     4,298       4,299       4,279       3.41

Boston, MA

  1st Lien, Senior Secured Loan – Unfunded(5),(16)     12.34% (L + 10.00%, 11.00% Floor)(13)     12/31/2019     2,250       —         (10     (0.01 )% 
             

 

 

   

 

 

   

 

 

 
                4,299       4,269       3.40
             

 

 

   

 

 

   

 

 

 

The Selling Source, LLC Las Vegas, NV

  1st Lien, Senior Secured
Loan(5),(16),(23)
 

Information and Data Services

  17.00% (9.00% PIK, 8.00% Cash)(7),(9)     12/31/2017     5,689       4,202       4,841       3.85

Tru Taj, LLC

  1st Lien, Senior Secured Bond(11)  

Retail

  12.00%     08/15/2021     16,000       15,346       11,960       9.52

Wayne, NJ

  1st Lien, Debtor in Possession Note(5),(28)     11.00%     01/22/2019     1,655       1,703       1,725       1.37
             

 

 

   

 

 

   

 

 

 
                17,049       13,685       10.90
             

 

 

   

 

 

   

 

 

 

Total Non-Control, Non-Affiliate Investments

                139,972       136,910       109.01 % 
             

 

 

   

 

 

   

 

 

 

Short-Term Investments – 63.06% of Net Assets

                 

 

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Table of Contents
Portfolio Company  

Security

 

Industry

 

Interest (1)

 

% of
Class

 

Maturity

  Par Amount
/Quantity
    Cost     Fair Value     % of
NAV
 

State Street Institutional

                 

Treasury Money Market Fund

  Premier Class       <1%       4,531,772       4,532       4,532       3.61

United States Treasury

  Treasury Bill     1.90%     9/27/2018     75,000       74,666       74,658       59.45
             

 

 

   

 

 

   

 

 

 

Total Short-Term Investments

                79,198       79,190       63.06
             

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS(14) – 221.75% of Net Assets

              $ 328,372     $ 278,493       221.75 % 
             

 

 

   

 

 

   

 

 

 

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

                $ (152,902     (121.75 )% 

NET ASSETS

                $ 125,591       100.00 % 
               

 

 

   

 

 

 

 

(1)

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

(2)

The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act. No unrestricted securities of the same issuer are outstanding.

(3)

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

(4)

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

(5)

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

(6)

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

(7)

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

(8)

Non-income producing security.

(9)

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

(10)

Indicates assets that the Company believes do not represent ‘‘qualifying assets’’ under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 18.28% were non-qualifying assets as of June 30, 2018.

(11)

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

(12)

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

(13)

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

(14)

As of June 30, 2018, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,691; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $52,345; the net unrealized depreciation was $50,884; the aggregate cost of securities for Federal income tax purposes was $329,337.

(15)

Restricted security initially obtained on February 28, 2017.

(16)

Restricted security initially obtained on November 3, 2016.

(17)

Restricted security initially obtained on December 14, 2017.

(18)

Restricted security initially obtained on May 17, 2017.

(19)

Restricted security initially obtained on September 28, 2017.

(20)

Restricted security initially obtained on November 15, 2017.

(21)

Restricted security initially obtained on December 13, 2017.

(22)

Restricted security initially obtained on December 20, 2017.

(23)

Loan defaulted on January 1, 2018.

 

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Table of Contents
(24)

Restricted security initially obtained on January 24, 2018.

(25)

Restricted security initially obtained on February 2, 2018.

(26)

Restricted security initially obtained on March 20, 2018.

(27)

Restricted security initially obtained on March 22, 2018.

(28)

Restricted security initially obtained on March 26, 2018.

(29)

Restricted security initially obtained on March 27, 2018.

(30)

Restricted security initially obtained on June 8, 2018.

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

Dollar amounts in thousands

L = LIBOR

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

Avanti Communications Group plc

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

PE Facility Solutions, LLC

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

International Wire Group, Inc.

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

Investment Manager and Administrator

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

 

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Table of Contents

Investment Selection

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

Idea Generation, Origination and Refinement

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

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

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

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

Due Diligence

GECM’s due diligence typically includes:

 

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

 

    review of historical and prospective financial information;

 

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

 

    verification of collateral;

 

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

 

    informal or formal background and reference checks.

Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the diligence process present the opportunity to GECM’s investment committee, which then determines whether to pursue the potential investment.

Approval of Investment Transactions

GECM’s procedures call for each new investment under consideration by the GECM analysts to be preliminarily reviewed at periodic meetings of GECM’s investment team. GECM’s investment team then 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.

 

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Table of Contents

GECM’s investment analysts conduct periodic reviews of the positions for which they are responsible with members of GECM’s investment committee. On a quarterly basis, formal reviews of each position are conducted by GECM’s investment committee.

GECM’s investment analysts and members of the GECM investment committee will jointly decide when to sell a position. The sale decision will then be given to GECM’s traders, who will execute the trade in consultation with the analyst and the applicable member of GECM’s investment committee.

Ongoing Relationship with Portfolio Companies

As a BDC, we offer, and must provide upon request, significant managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.

GECM’s investment team monitors our portfolio companies on an ongoing basis. They monitor the financial trends of each portfolio company and its respective industry to assess the appropriate course of action for each investment. GECM’s ongoing monitoring of a portfolio company will include both a qualitative and quantitative analysis of the company and its industry.

Valuation Procedures

We value our assets, an essential input in the determination of our net asset value, consistent with GAAP and as required by the Investment Company Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” for an extended discussion of our methodology.

Staffing

We do not currently have any employees. Mr. Reed is our Chief Executive Officer and President and GECM’s Chief Investment Officer. Under the Administration Agreement, GECM provides the services of John J. Woods, our Chief Financial Officer and Treasurer, and Adam M. Kleinman, our Secretary and Chief Compliance Officer.

Competition

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

Exemptive Relief

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

Formation Transactions

On June 23, 2016, we entered into the Merger Agreement with Full Circle that provided for the Merger. Concurrent with delivery of the Merger Agreement, we entered into the Subscription Agreement with GEC and the MAST Funds. Per the Subscription Agreement, GEC contributed $30.0 million to us. Prior to the Merger and our election to be regulated as a BDC under the Investment Company Act, per the Subscription Agreement, we acquired the Initial GECC Portfolio from the MAST Funds. As a result of the transactions contemplated by the Subscription Agreement, the MAST Funds owned approximately 75% of the pre-Merger outstanding shares of our common stock and GEC owned 25% of the pre-Merger outstanding shares of our common stock. The Merger was completed on November 3, 2016.

 

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Investment Management Agreement

Management Services

GECM serves as our investment adviser and is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board, GECM manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Investment Management Agreement, GECM:

 

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

 

    identifies, evaluates and negotiates the structure of our investments (including performing due diligence on our prospective portfolio companies);

 

    closes and monitors our investments; and

 

    determines the securities and other assets that we purchase, retain or sell.

GECM was initially formed to provide investment advisory services to us. However, GECM’s services to us under the Investment Management Agreement are not exclusive, and GECM is free to furnish similar services to other entities.

Management & Incentive Fees

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

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

The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes any accretion of OID, market discount, PIK interest, PIK dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that we and our consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”).

Pre-incentive fee net investment income does not include any realized capital gains or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses.

Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined in accordance with GAAP) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 1.75% per quarter (7.00% annualized). If market interest rates rise, we may be able to invest in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for GECM to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.50% base management fee.

We pay the incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

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

 

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

 

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

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

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

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

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

 

LOGO

Percentage of pre-incentive fee net investment income

allocated to income related portion of incentive fee

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

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

The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment. The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (1) the net sales price of each investment in our portfolio when sold is less than (2) the accreted or amortized cost basis of such investment. The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the fair value of each investment in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investment.

We will defer cash payment of any incentive fee otherwise payable to GECM in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative Pre-Incentive Fee Net Return during the most recent Trailing Twelve Quarters less (2) the aggregate incentive fees that were previously paid to GECM during such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid).

Examples of Quarterly Incentive Fee Calculation

The following hypothetical calculations illustrate the calculation of net investment income based incentive fees under the Investment Management Agreement.

 

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    Assumption 1     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 GECM with an incentive fee of 20% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.1875% in any calendar quarter.
(7) The catch-up is calculated as 2.1875% – 1.75%= 0.4375%
(8) The incentive fee is calculated as (100% × 0.4375%) + (20% × (2.425% – 2.1875%)) = 0.475%. The total fee is the sum of 0.4375 (the catch-up) plus 0.0475% (20% of the excess over the hurdle rate).

The following hypothetical calculations illustrate the calculation of the capital gains 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

 

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(6) $7.0 million (20% multiplied by $35.0 million ($35.0 million cumulative realized capital gains)) less $5.8 million cumulative capital gains fee paid in Year 2 and Year 3
(7) Greater of (i) zero and (ii) $5.0 million (20% multiplied by $25 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $7.0 million cumulative capital gains fee paid in Year 2, Year 3, and Year 4

As illustrated in Year 3 of Assumption 1 above, if GECC were to be wound up on a date other than December 31 of any year, we may have paid aggregate capital gain incentive fees that are more than the amount of such fees that would be payable if GECC had been wound up on December 31 of such year.

For the year ended December 31, 2017, we incurred $2.3 million in base management fees and $4.4 million in income based fees accrued during the period. The incentive fees were deferred in accordance with the Investment Management Agreement. There was no capital gains incentive fee earned by GECM as calculated under the Investment Management Agreement for the year ended December 31, 2017.

For the period ended December 31, 2016, we incurred $0.4 million in base management fees and $0.9 million in income based fees accrued during the period. The incentive fees were deferred in accordance with the Investment Management Agreement. There was no capital gains incentive fee earned by GECM as calculated under the Investment Management Agreement for the period ended December 31, 2016.

Payment of Expenses

The services of all investment professionals and staff of GECM, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by GECM. We bear all other costs and expenses of our operations and transactions, including (without limitation):

 

    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;

 

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    the expenses of and fees for registering or qualifying our shares for sale and of maintaining our registration and registering us as a broker or a dealer;

 

    the fees and expenses of our directors who are not interested persons (as defined in the Investment Company Act);

 

    the cost of preparing and distributing reports, proxy statements and notices to stockholders, the SEC and other governmental or regulatory authorities;

 

    costs of holding stockholders’ meetings;

 

    listing fees;

 

    the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by our charter or bylaws insofar as they govern agreements with any such custodian;

 

    any amounts payable under the Administration Agreement;

 

    our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

    our allocable portion of the costs associated with maintaining any computer software, hardware or information technology services (including information systems, Bloomberg or similar terminals, cyber security and related consultants and email retention) that are used by us or by GECM or its respective affiliates on our behalf (which allocable portion shall exclude any such costs related to investment professionals of GECM providing services to us);

 

    direct costs and expenses incurred by us or GECM in connection with the performance of administrative services on our behalf, including printing, mailing, long distance telephone, cellular phone and data service, copying, secretarial and other staff, independent auditors and outside legal costs;

 

    all other expenses incurred by us or GECM in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of GECM’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs (including reasonable travel expenses); and

 

    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. Our expenses did not exceed the cap for the period, and as such no reimbursement was required under the agreement.

Duration and Termination

Our Board approved the Investment Management Agreement on August 8, 2016. Unless terminated earlier, the Investment Management Agreement will continue in effect until September 27, 2018, and will renew for successive annual periods thereafter if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not “interested persons.” The Investment Management Agreement will automatically terminate if it is assigned. The Investment Management Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other.

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

 

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Indemnification

We agreed to indemnify GECM, its stockholders and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with it, to the fullest extent permitted by law, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as our investment adviser.

Organization of the Investment Adviser

GECM is a Delaware corporation and is registered as an investment adviser under the Advisers Act. GECM’s principal executive offices are located at 800 South Street, Suite 230, Waltham, MA 02453.

Regulation as a Business Development Company

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

 

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

 

    more than 50% of the outstanding voting securities of such company.

A majority of our directors must be persons who are not interested persons, as that term is defined in the Investment Company Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 150%. We may also be prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

We are generally unable to sell 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 assets other than “qualifying assets” unless, at the time we make such acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:

 

    securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company;

 

    securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants or rights relating to such securities; and

 

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    cash, cash items, government securities or high quality debt securities (within the meaning of the Investment Company Act), maturing in one year or less from the time of investment.

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;

 

    is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250.0 million; or

 

    meets such other criteria as may be established by the SEC.

Control, as defined by the Investment Company Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company.

In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a BDC.

To include certain securities described above as qualifying assets for the purpose of the 70% test, a BDC must offer to the issuer of those securities managerial assistance such as providing guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide managerial assistance to our portfolio companies.

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which are referred to, collectively, as temporary investments, so that 70% of our assets, as applicable, are qualifying assets. We make purchases that are consistent with our purpose of making investments in securities described in paragraphs 1 through 3 of Sec. 55(a) of the Investment Company Act. We will invest in U.S. Treasury bills or in repurchase agreements that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit.

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, if our asset coverage, as defined in the Investment Company Act, is at least equal to 150% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of our common stock unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary purposes without regard to asset coverage.

We and GECM have each adopted a code of ethics pursuant to Rule 17j-1 under the Investment Company Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain transactions by our or GECM’s personnel, respectively. Our and GECM’s codes of ethics generally do not permit investments by our or GECM’s employees, as applicable, in securities that may be purchased or held by us or GECM, as applicable. You may read and copy these codes of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, each code of ethics is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may 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.

 

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Proxy Voting Policies and Procedures

We have delegated our proxy voting responsibility to GECM. The Proxy Voting Policies and Procedures of GECM are set forth below. The guidelines are reviewed periodically by GECM and our non-interested directors, and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below, “we,” “our” and “us” refers to GECM.

Introduction

As an investment adviser registered under the Advisers Act, GECM has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, GECM recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.

These policies and procedures for voting proxies for GECM’s investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.

Proxy Policies

GECM votes proxies relating to our portfolio securities in what it perceives to be the best interest of its clients. GECM reviews on a case-by-case basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by its clients. Although GECM generally votes against proposals that may have a negative impact on its clients’ portfolio securities, GECM may vote for such a proposal if there exists compelling long-term reasons to do so.

GECM proxy voting decisions are made by the senior officers who are responsible for monitoring each of its clients’ investments. To ensure that our vote is not the product of a conflict of interest, GECM requires that: (i) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.

Proxy Voting Records

You may obtain information about how GECM voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, MA 02453.

Material Federal Income Tax Matters

We elected to be taxed as a RIC beginning with our tax year that began on October 1, 2016 and ended on December 31, 2016, and we intend to continue to qualify to be taxed as a RIC under the Code. To continue to qualify as a RIC, we must, among other things, (a) derive in each taxable year at least 90 percent of our gross income from dividends, interest (including tax-exempt interest), payments with respect to certain securities, loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including but not limited to gain from options, futures and forward contracts) derived with respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership” (a “QPTP”); and (b) diversify our holdings so that, at the end of each quarter of each taxable year (i) at least 50 percent of the market value of our total assets is represented by cash and cash items, U.S. Government securities, the securities of other RICs and other securities, with other securities limited, in respect of any one issuer, to an amount not greater than five percent of the value of our total assets and not more than 10 percent of the outstanding voting securities of such issuer (subject to the exception described below), and (ii) not more than 25 percent of the market value of our total assets is invested in the securities (other than U.S. Government securities and the securities of other RICs) (A) of any issuer, (B) of any two or more issuers that we control and that are determined to be engaged in the same business or similar or related trades or businesses, or (C) of one or more QPTPs. We may generate certain income that might not qualify as good income for purposes of the 90% annual gross income requirement described above. We will monitor our transactions to endeavor to prevent our disqualification as a RIC.

If we fail to satisfy the 90% annual gross income requirement or the asset diversification requirements discussed above in any taxable year, we may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the asset diversification requirements where we correct the failure within a specified period. If the applicable relief provisions are not available or cannot be met, all of our income would be subject to corporate-level U.S. federal income tax as described below. We cannot provide assurance that we would qualify for any such relief should we fail the 90% annual gross income requirement or the asset diversification requirements discussed above.

 

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As a RIC, in any taxable year with respect to which we timely distribute at least 90% of the sum of:

 

    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 generally intend to distribute any income and capital gains in the manner necessary to minimize imposition of the four percent federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. For example, we may be required to recognize OID interest for U.S. federal income tax purposes, which may involve the recognition of distributable income without a corresponding receipt of cash (“phantom income”). Our Board may determine that it is in our stockholders’ best interest for us to pay tax on such phantom income rather that borrow or liquidate portfolio positions to fund a cash distribution to stockholders of such amounts to avoid imposition of the excise tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

If, in any particular taxable year, we do not satisfy the Annual Distribution Requirement or were to fail to qualify as a RIC (for example, because we fail the 90% annual gross income requirement described above), and relief is not available as discussed above, all of our taxable income (including our net capital gains) will be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and distributions generally will be taxable to the stockholders as ordinary dividends to the extent of our current and accumulated earnings and profits.

We may decide to be taxed as a regular corporation even if we would otherwise qualify as a RIC if we determine that treatment as a corporation for a particular year would be in our best interests.

If we realize a net capital loss, the excess of our net short-term capital loss over our net long-term capital gain is treated as a short-term capital loss arising on the first day of our next taxable year and the excess of our net long-term capital loss over our net short-term capital gain is treated as a long-term capital loss arising on the first day of our next taxable year. If future capital gain is offset by carried forward capital losses, such future capital gain is not subject to fund-level U.S. federal income tax, regardless of whether they are distributed to stockholders. Accordingly, we do not expect to distribute any such offsetting capital gain. A RIC cannot carry back or carry forward any net operating losses.

Our Investments

Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things:

 

    disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction;

 

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    convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-term capital gain or ordinary income;

 

    convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited);

 

    cause us to recognize income or gain without a corresponding receipt of cash;

 

    adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur;

 

    adversely alter the characterization of certain complex financial transactions; and

 

    produce income that will not qualify as “good income” for purposes of the 90% annual gross income requirement described above.

We will monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities (even if it is not advantageous to dispose of such securities) to mitigate the effect of these rules and prevent disqualification of us as a RIC.

Investments we make in securities issued at a discount or providing for deferred interest or PIK interest are subject to special tax rules that will affect the amount, timing and character of distributions to stockholders. For example, with respect to securities issued at a discount, we will generally be required to accrue daily as income a portion of the discount and to distribute such income on a timely basis each year to maintain our qualification as a RIC and to avoid U.S. federal income and excise taxes. Since in certain circumstances we may recognize income before or without receiving cash representing such income, we may have difficulty making distributions in the amounts necessary to satisfy the requirements for maintaining RIC status and for avoiding U.S. federal income and excise taxes. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thereby be subject to corporate-level U.S. federal income tax.

Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work out, modify or otherwise restructure our investment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any such restructuring may also result in our recognition of a substantial amount of non-qualifying income for purposes of the 90% gross income requirement or our receiving assets that would not count toward the asset diversification requirements.

Gain or loss recognized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.

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

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

If we hold 10% or more of the shares in or the value of a foreign corporation that is treated as a controlled foreign corporation (“CFC”), we may be required to include in our gross income our pro rata share of such CFC’s “subpart F income” and “global intangible low-taxed income” whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S.

 

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Stockholders. A U.S. Stockholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of or 10% or more of the value of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.

Although the Code generally provides that income inclusions from QEFs and deemed distributions of subpart F income and global intangible low-taxed income from CFCs will be “good income” for purposes of the 90% gross income requirement to the extent such income is distributed to a RIC in the year it is included in the RIC’s income, the Code does not specifically provide whether income inclusions from a QEF or deemed distributions from a CFC during the RIC’s taxable year with respect to which no distribution is received would be “good income” for the 90% gross income requirement. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and deemed distributions from a CFC included in a RIC’s income would constitute “good income” for purposes of the 90% gross income requirement. The Department of the Treasury, however, has proposed regulations that would treat such income as not being “good income” for purposes of the 90% gross income requirement. In its explanation accompanying the proposed regulations, the Department of the Treasury takes the position that, notwithstanding prior private letter rulings to the contrary, the current language of the Code would treat such income as not being “good income” for purposes of the 90% gross income requirement even in the absence of the proposed regulations. Accordingly, such income may not be treated as “good income” if the proposed regulations are finalized or if the Department of the Treasury’s interpretation of current law applies. In such a case, we may fail to qualify as a RIC if we realize a material amount of such income.

Our functional currency is the U.S. dollar for U.S. federal income tax purposes. Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

If we borrow money, we may be prevented by loan covenants from declaring and paying dividends in certain circumstances. Limits on our payment of dividends may prevent us from meeting the Annual Distribution Requirement, and may, therefore, jeopardize our qualification for taxation as a RIC, or subject us to the 4% excise tax.

Even if we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements, under the Investment Company Act, we are not permitted to make distributions to our stockholders while our debt obligations and senior securities are outstanding unless certain “asset coverage” tests are met. This may also jeopardize our qualification for taxation as a RIC or subject us to the 4% excise tax.

Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and (2) other requirements relating to our status as a RIC, including the asset diversification requirements. If we dispose of assets to meet the Annual Distribution Requirement, the asset diversification requirements, or the 4% excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

Some of the income that we might otherwise earn, such as lease income, management fees, or income recognized in a work-out or restructuring of a portfolio investment, may not satisfy the 90% gross 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

 

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more than two consecutive years and then to seek to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special election to pay corporate level tax on any such unrealized appreciation recognized during the succeeding five-year period.

Administration Agreement

Our Board approved the Administration Agreement on August 8, 2016. Pursuant to the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record-keeping services at such office facilities and other such services as the Administrator. Under the Administration Agreement, GECM will, from time to time, provide, or otherwise arrange for the provision of, other services GECM determines to be necessary or useful to perform its obligations under the Administration Agreement, including retaining the services of financial, compliance, accounting and administrative personnel that perform services on our behalf, including personnel to serve as our Chief Financial Officer and Chief Compliance Officer. Under the Administration Agreement, GECM also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition