gecc-10q_20190630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

or

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

 

For the transition period from _______ to _________

Commission File Number: 814-01211

 

Great Elm Capital Corp.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

81-2621577

(State or other jurisdiction of incorporation or organization)

 

(I.R.S.  Employer Identification No.)

 

 

 

800 South Street, Suite 230, Waltham, MA

 

02453

(Address of principal executive offices)

 

(Zip Code)

 

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

 

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

GECC

 

Nasdaq Global Market

6.50% Notes due 2022

 

GECCL

 

Nasdaq Global Market

6.75% Notes due 2025

 

GECCM

 

Nasdaq Global Market

6.50% Notes due 2024

 

GECCN

 

Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

Non-accelerated filer

 

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

 

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

 

As of August 6, 2019, the registrant had 10,062,682 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

Item 2.

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

1

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

12

Item 4.

Controls and Procedures

13

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

13

Item 1A.

Risk Factors

13

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

13

Item 3.

Defaults Upon Senior Securities

14

Item 4.

Mine Safety Disclosures

14

Item 5.

Other Information

14

Item 6.

Exhibits

15

 

Signatures

16

 

Index to Consolidated Financial Statements

F-1

 

Consolidated Statements of Assets and Liabilities (unaudited)

F-2

 

Consolidated Statements of Operations (unaudited)

F-3

 

Consolidated Statements of Changes in Net Assets (unaudited)

F-4

 

Consolidated Statements of Cash Flows (unaudited)

F-5

 

Consolidated Schedule of Investments (unaudited)

F-6

 

Notes to the Unaudited Consolidated Financial Statements

F-14

 

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (our “Form 10-K”).

The information contained herein may contain “forward-looking statements” based on our current expectations, assumptions and estimates about us and our industry.  These forward-looking statements involve risks and uncertainties.  Words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “could,” “may,” “plan” and other similar expressions identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements that are subject to risks, uncertainties and assumptions.  Our actual results could differ materially from those we express in the forward-looking statements as a result of several factors more fully described in “Risk Factors” and elsewhere in our Form 10-K and in this Quarterly Report on Form 10-Q (this “Form 10-Q”).  The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made.  We undertake no obligation to update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as required by law.

 

i


 

PART I—FINANCIAL INFORMATION

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

Item 1.  Financial Statements.

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

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a business development company (“BDC”) that seeks to generate both current income and capital appreciation through debt and equity investments.  We invest primarily in the debt instruments of middle-market companies and small businesses, generally in the form of senior secured and unsecured notes, as well as senior secured loans, junior loans and mezzanine debt.  We will from time to time make equity investments as part of restructuring credits or in specialty finance businesses which offer significant earnings potential and which we deem complementary to the Company’s corporate credit portfolio.

On September 27, 2016, we and Great Elm Capital Management, Inc.  (“GECM”), our external manager, entered into an investment management agreement (the “Investment Management Agreement”) and an administration agreement (the “Administration Agreement”), and we began to accrue obligations to GECM under those agreements.  The Investment Management Agreement renews for successive annual periods, subject to requisite Board and/or stockholder approvals.

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

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger and acquisition activity, pricing in the high yield and leveraged loan credit markets, our expectations of future investment opportunities, the general economic environment and the competitive environment for the types of investments we make.  As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements.

Revenues

We generate revenue primarily from interest on the debt investments that we hold.  We may also generate revenue from dividends on the equity investments that we hold, capital gains on the disposition of investments, and lease, fee, and other income.  Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity.  Our debt investments generally pay interest quarterly or semi-annually.  Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity.  In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or pay-in-kind (“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.

1


 

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

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

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

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

 

The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to an independent valuation firm (or 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 investments comprising in the aggregate less than 5% of our total capitalization and individually less than 1% 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.

2


 

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 and 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, and 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 accounting principles generally accepted in the United States of America (“GAAP”) into 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 original issue discounts (“OID”), earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature.  Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned.  Prepayment fees and similar income due upon the early repayment of a loan or debt security are recognized when earned and are included in interest income.

We may purchase debt investments at a discount to their face value.  Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method, unless there are material questions as to collectability.

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 values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

3


 

Portfolio and Investment Activity

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

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

%

Quarter ended September 30, 2018

 

 

38,969

 

 

 

(37,991

)

 

 

10.40

%

Quarter ended December 31, 2018

 

 

34,849

 

 

 

(40,028

)

 

 

10.32

%

For the year ended December 31, 2018

 

 

174,965

 

 

 

(134,817

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

54,846

 

 

 

(59,869

)

 

 

11.28

%

Quarter ended June 30, 2019

 

 

62,238

 

 

 

(37,802

)

 

 

9.61

%

For the six months ended June 30, 2019

 

 

117,084

 

 

 

(97,671

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Since inception

 

$

699,084

 

 

$

(449,210

)

 

 

 

 

(1)

Includes new investments, additional fundings (inclusive of those on revolving credit facilities), refinancings and capitalized PIK income.  Investments in short-term securities, including U.S. 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 U.S. 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, unless such debt securities are valued at zero.

4


 

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the six months ended June 30, 2019 and the year ended December 31, 2018.  Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, are excluded from the table below.

(in thousands)

 

For the Six Months Ended June 30, 2019

 

 

For the Year Ended December 31, 2018

 

Beginning Investment Portfolio

 

$

184,186

 

 

$

164,870

 

Portfolio Investments acquired(1)

 

 

117,084

 

 

 

174,965

 

Amortization of premium and accretion of discount, net

 

 

2,713

 

 

 

3,485

 

Portfolio Investments repaid or sold(2)

 

 

(97,671

)

 

 

(134,817

)

Net change in unrealized appreciation (depreciation) on investments

 

 

(3,109

)

 

 

(26,752

)

Net realized gain (loss) on investments

 

 

1,015

 

 

 

2,435

 

Ending Investment Portfolio

 

$

204,218

 

 

$

184,186

 

(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).  

Portfolio Classification

The following table shows the fair value of our portfolio of investments by industry as of June 30, 2019 and December 31, 2018 (in thousands):

 

 

June 30, 2019

 

 

December 31, 2018

 

Industry

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Wireless Telecommunications Services

 

$

40,044

 

 

 

19.61

%

 

$

35,631

 

 

 

19.35

%

Building Cleaning and Maintenance Services

 

 

19,798

 

 

 

9.70

%

 

 

18,443

 

 

 

10.01

%

Retail

 

 

19,027

 

 

 

9.32

%

 

 

14,227

 

 

 

7.72

%

Internet Media

 

 

16,112

 

 

 

7.89

%

 

 

-

 

 

 

0.00

%

Business Services

 

 

14,726

 

 

 

7.21

%

 

 

9,505

 

 

 

5.16

%

Food & Staples

 

 

13,902

 

 

 

6.81

%

 

 

8,935

 

 

 

4.85

%

Software Services

 

 

13,863

 

 

 

6.79

%

 

 

15,942

 

 

 

8.67

%

Gaming,  Lodging & Restaurants

 

 

12,023

 

 

 

5.89

%

 

 

9,687

 

 

 

5.26

%

Water Transport

 

 

10,768

 

 

 

5.27

%

 

 

11,889

 

 

 

6.45

%

Radio Broadcasting

 

 

8,299

 

 

 

4.06

%

 

 

8,807

 

 

 

4.78

%

Specialty Finance

 

 

7,732

 

 

 

3.79

%

 

 

-

 

 

 

0.00

%

Restaurants

 

 

6,809

 

 

 

3.33

%

 

 

-

 

 

 

0.00

%

Apparel & Textile Products

 

 

5,810

 

 

 

2.85

%

 

 

-

 

 

 

0.00

%

Industrial

 

 

5,355

 

 

 

2.62

%

 

 

-

 

 

 

0.00

%

Real Estate Services

 

 

4,663

 

 

 

2.28

%

 

 

4,479

 

 

 

2.43

%

Hotel Operator

 

 

3,177

 

 

 

1.56

%

 

 

3,212

 

 

 

1.74

%

Consumer Finance

 

 

1,392

 

 

 

0.68

%

 

 

1,830

 

 

 

0.99

%

Construction Materials Manufacturing

 

 

474

 

 

 

0.23

%

 

 

-

 

 

 

0.00

%

Wireless Communications

 

 

214

 

 

 

0.10

%

 

 

596

 

 

 

0.32

%

Maritime Security Services

 

 

30

 

 

 

0.01

%

 

 

34

 

 

 

0.02

%

Manufacturing

 

 

-

 

 

 

0.00

%

 

 

15,575

 

 

 

8.46

%

Industrial Conglomerates

 

 

-

 

 

 

0.00

%

 

 

13,365

 

 

 

7.26

%

Chemicals

 

 

-

 

 

 

0.00

%

 

 

7,601

 

 

 

4.13

%

Technology Services

 

 

-

 

 

 

0.00

%

 

 

4,428

 

 

 

2.40

%

Total

 

$

204,218

 

 

 

100.00

%

 

$

184,186

 

 

 

100.00

%

 

5


 

Results of Operations

Investment Income

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Total Investment Income

 

$

6,711

 

 

$

0.66

 

 

$

7,162

 

 

$

0.67

 

 

$

13,024

 

 

$

1.25

 

 

$

14,660

 

 

$

1.38

 

Interest income

 

 

5,664

 

 

 

0.55

 

 

 

6,982

 

 

 

0.66

 

 

 

11,384

 

 

 

1.09

 

 

 

14,347

 

 

 

1.35

 

Dividend income

 

 

538

 

 

 

0.05

 

 

 

49

 

 

 

0.00

 

 

 

1,011

 

 

 

0.10

 

 

 

155

 

 

 

0.01

 

Other income

 

 

509

 

 

 

0.05

 

 

 

131

 

 

 

0.01

 

 

 

629

 

 

 

0.06

 

 

 

158

 

 

 

0.01

 

(1)

The per share amounts are based on a weighted average of 10,239,631 and 10,439,572 shares for the three and six months ended June 30, 2019, respectively.

(2)

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

Investment income consists of interest income, including net amortization of premium and accretion of discount on loans and debt securities, dividend income and other income, which primarily consists of amendment fees, commitment fees and funding fees on loans.

The decrease in interest income for each of the three and six months ended June 30, 2019 as compared to the corresponding periods in the prior year is primarily due to the April 2018 restructuring of our investment in Avanti Communications Group plc’s (“Avanti”) third lien senior secured notes (the “third lien notes”), in which the third lien notes were converted into Avanti common equity which is currently non-income producing.  The third lien notes accrued $1.5 million and $3.5 million of interest income during the three and six months ended June 30, 2018, respectively.  The decrease in interest income was partially offset by increased interest income due to overall growth in our interest earning investment portfolio in the current year.

Interest income included non-cash PIK income of $1.2 million and $2.4 million for the three and six months ended June 30, 2019, respectively, and $1.7 million and $5.0 million for the three and six months ended June 30, 2018, respectively.  The year-over-year decreases in non-cash PIK income for the periods presented is primarily due to the debt-for-equity conversion of the third lien notes along with a decrease in the interest rate on Avanti’s second lien senior secured notes, which we still held as an investment as of June 30, 2019.

The increase in dividend income for each of the three and six months ended June 30, 2019 as compared to the corresponding periods in the prior year is primarily attributable to the dividends earned from the Company’s investment in Prestige Capital Corporation (“Prestige”) which was acquired in February 2019.

The increase in other income for each of the three and six months ended June 30, 2019 as compared to the corresponding periods in the prior year is primarily attributable to commitment and funding fees earned on our May 2019 investment in Avanti’s 1.5 lien senior secured notes.

6


 

Expenses

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Total Expenses

 

$

3,716

 

 

$

0.36

 

 

$

1,084

 

 

$

0.10

 

 

$

7,245

 

 

$

0.69

 

 

$

4,716

 

 

$

0.44

 

Management fees

 

 

742

 

 

 

0.07

 

 

 

754

 

 

 

0.07

 

 

 

1,448

 

 

$

0.14

 

 

 

1,447

 

 

 

0.14

 

Incentive fees

 

 

749

 

 

 

0.07

 

 

 

(2,149

)

 

 

(0.20

)

 

 

1,445

 

 

$

0.14

 

 

 

(1,183

)

 

 

(0.10

)

Total advisory and management fees

 

$

1,491

 

 

$

0.15

 

 

$

(1,395

)

 

$

(0.13

)

 

$

2,893

 

 

$

0.28

 

 

$

264

 

 

$

0.02

 

Administration fees

 

 

241

 

 

 

0.02

 

 

 

487

 

 

 

0.05

 

 

 

452

 

 

 

0.04

 

 

 

797

 

 

 

0.07

 

Directors’ fees

 

 

49

 

 

 

0.00

 

 

 

50

 

 

 

0.00

 

 

 

99

 

 

 

0.01

 

 

 

99

 

 

 

0.01

 

Interest expense

 

 

1,571

 

 

 

0.15

 

 

 

1,456

 

 

 

0.14

 

 

 

3,025

 

 

 

0.29

 

 

 

2,731

 

 

 

0.26

 

Professional services

 

 

229

 

 

 

0.02

 

 

 

294

 

 

 

0.03

 

 

 

468

 

 

 

0.04

 

 

 

465

 

 

 

0.04

 

Custody fees

 

 

15

 

 

 

0.00

 

 

 

15

 

 

 

0.00

 

 

 

30

 

 

 

0.00

 

 

 

29

 

 

 

0.00

 

Other

 

 

120

 

 

 

0.01

 

 

 

177

 

 

 

0.02

 

 

 

278

 

 

 

0.03

 

 

 

331

 

 

 

0.03

 

(1)

The per share amounts are based on a weighted average of 10,239,631 and 10,439,572 shares for the three and six months ended June 30, 2019, respectively.

(2)

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

Expenses are largely comprised of advisory fees and administration fees paid to GECM and interest expense on our outstanding notes payable.  See “—Liquidity and Capital Resources.”  Advisory fees include management fees and incentive fees calculated in accordance with the Investment Management Agreement, and administration fees include direct costs reimbursable to GECM under the Administration Agreement and fees paid for sub-administration services.

Incentive fees for each of the three and six months ended June 30, 2018 included a one-time reversal of $2.6 million of incentive fees recorded in prior periods.  This reversal was the result of the conversion of the third lien notes in April 2018 discussed above under “—Investment Income”.  As a result of this debt-for-equity conversion, it was determined that the accrued incentive fees payable associated with the portion of accrued PIK interest generated by the third lien notes should not at this time be recognized as a liability. 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 from our Avanti investment results in gross proceeds to us in excess of our initial cost basis in the third lien notes.  Excluding the impact of the reversal and an additional $0.2 million of incentive fees which were not recognized for the three months ended June 30, 2018 as a result of the restructuring, incentive fees would have been $0.8 million and $1.8 million for the three and six months ended June 30, 2018, respectively.

Administration fees for the three and six months ended June 30, 2019 decreased as compared to the three and six months ended June 30, 2018 due to one-time costs associated with staff restructuring at GECM.

The increase in interest expense for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 is primarily due to the issuance of $46.4 million in aggregate principal amount of 6.75% notes due 2025 (the “GECCM Notes”) in January and February 2018 and the issuance of $42.5 million in aggregate principal amount of 6.50% notes due 2024 (the “GECCN Notes”) in June 2019, which resulted in a weighted average outstanding debt balance of $85.1 million and $82.1 million for the three and six months ended June 30, 2019, respectively, as compared to $79.0 million and $74.4 million for the three and six months ended June 30, 2018, respectively.

Other expenses include various administrative expenses such as shareholder services, filing, transfer agency and insurance costs.  The decrease in other expenses for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 is primarily related to the timing of work performed by these service providers, and the resultant billing schedules.

7


 

Realized Gains (Losses) on Investments

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Net Realized Gain (Loss)

 

$

410

 

 

$

0.04

 

 

$

810

 

 

$

0.08

 

 

$

1,018

 

 

$

0.10

 

 

$

1,127

 

 

$

0.11

 

Gross realized gain

 

 

449

 

 

 

0.04

 

 

 

813

 

 

 

0.08

 

 

 

1,844

 

 

 

0.18

 

 

 

1,151

 

 

 

0.11

 

Gross realized loss

 

 

(39

)

 

 

(0.00

)

 

 

(3

)

 

 

(0.00

)

 

 

(826

)

 

 

(0.08

)

 

 

(24

)

 

 

(0.00

)

(1)

The per share amounts are based on a weighted average of 10,239,631 and 10,439,572 shares for the three and six months ended June 30, 2019, respectively.

(2)

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

During the three months ended June 30, 2019, net realized gains were primarily driven by realized gains of approximately $0.3 million on the sale of our investment in Michael Baker International, LLC secured bonds during the quarter.  During the six months ended June 30, 2019, net realized gains were largely driven by the sale of our investment in International Wire Group, Inc. secured bonds which resulted in a realized gain of approximately $1.1 million along with an additional $0.1 million in realized gains as a result of acceleration of OID.  Gross realized losses for the six months ended June 30, 2019 were primarily comprised of the realized loss of approximately $0.8 million on the sale of our investment in Sungard Availability Services Capital, Inc. secured loans.

During the three months ended June 30, 2018, net realized gains were primarily related to realized gains resulting from the sale of our investment in PR Wireless, Inc.’s senior secured loan and a partial sale of our investment in NANA Development Corp. senior secured bonds.  Net realized gains for the six months ended June 30, 2018 also included realized gains in connection with the accelerated accretion of OID on loans initially acquired at a discount and a partial repayment of our investment in PE Facility Solutions, LLC term loan B.

8


 

Unrealized Appreciation (Depreciation) on Investments

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Net increase (decrease) in unrealized appreciation/ depreciation

 

$

(7,783

)

 

$

(0.76

)

 

$

(4,240

)

 

$

(0.39

)

 

$

(3,107

)

 

$

(0.30

)

 

$

(12,462

)

 

$

(1.17

)

Increases in unrealized appreciation/ depreciation

 

 

1,297

 

 

 

0.13

 

 

 

4,485

 

 

 

0.42

 

 

 

4,620

 

 

 

0.44

 

 

 

2,788

 

 

 

0.26

 

Decreases in unrealized appreciation/ depreciation

 

 

(9,080

)

 

 

(0.89

)

 

 

(8,725

)

 

 

(0.82

)

 

 

(7,727

)

 

 

(0.74

)

 

 

(15,250

)

 

 

(1.43

)

(1)

The per share amounts are based on a weighted average of 10,239,631 and 10,439,572 shares for the three and six months ended June 30, 2019, respectively.

(2)

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

For each of the three and six months ended June 30, 2019, the net unrealized depreciation was largely driven by decreases in the valuation of portfolio investments, increases in our cost basis due to accretion of discount on loans and debt securities and the exit of investments which had unrealized appreciation in prior periods.  We recognized unrealized depreciation of $6.7 million and $3.6 million on our investments in Avanti bonds and equity for the three and six months ended June 30, 2019, respectively, primarily driven by changes in the fair value of the loans.  For the three and six months ended June 30, 2019, we recognized unrealized depreciation of $0.8 million and $1.4 million, respectively, on our investment in Commercial Barge Line Company (“Commercial Barge”), for which approximately half of the unrealized depreciation in each period is attributable to increases in cost basis due to the accretion of discount.  Similarly, we recognized unrealized depreciation of $0.5 million and $1.0 million, respectively, over the same periods on our investment in PFS Holdings Corp., of which nearly all of the unrealized depreciation in each period is attributable to increases in cost basis due to the accretion of discount.

Unrealized depreciation for each of the three and six months ended June 30, 2019, was partially offset by unrealized appreciation due to increases in the valuation of certain portfolio investments.  For example, for the three months ended June 30, 2019 we recognized unrealized appreciation of $0.5 million on our investment in Finastra Group Holdings, Ltd. (“Finastra”), $0.4 million on our investment in Prestige and $0.2 million on our investment in Research Now Group, Inc. (“Research Now”) first lien secured revolver, and for the six months ended June 30, 2019, we recognized unrealized appreciation of $1.0 million on our investment in Finastra, $0.4 million on our investments in Research Now and $0.2 million on our investment in Tallage Davis, LLC.  In addition, for the six months ended June 30, 2019, the restructuring of our investment in Tru Taj, LLC (“Tru Taj”) and the subsequent valuation of the resulting common stock in TRU (UK) Asia Limited and TRU (UK) Asia Limited Liquidating Trust we received in such restructuring in exchange for Tru Taj debt securities, resulted in net unrealized appreciation of approximately $1.0 million.

For each of the three and six months ended June 30, 2018, the net unrealized depreciation was primarily driven by lower valuations of our portfolio investments.  Most notably, we recognized net unrealized depreciation of $6.3 million and $8.3 million on our investment in Avanti bonds and equity for the three and six months ended June 30, 2018, respectively.  In addition, we recognized unrealized depreciation of $0.3 million and $1.7 million on our investment in OPS Acquisition Limited, and $0.4 million and $2.9 million on our investment in Tru Taj, for the three and six months ended June 30, 2018, respectively.  These losses were partially offset by unrealized appreciation on other portfolio investments, most notably Commercial Barge, for which we recognized unrealized appreciation of $0.8 million and $0.9 million for the three and six months ended June 30, 2018, respectively.

9


 

Liquidity and Capital Resources

At June 30, 2019, we had approximately $2.5 million of cash and cash equivalents, none of which was restricted in nature.  At June 30, 2019, we also had $50.3 million invested in a money market fund that is classified as an investment rather than cash and cash equivalents.

At June 30, 2019, we had investments in 27 debt instruments across 22 companies, totaling approximately $173.2 million at fair value and seven equity investments in six companies, totaling approximately $31.0 million 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, 2019, we had approximately $20.2 million 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, 2019 balance sheet to satisfy the unfunded commitments.

For the six months ended June 30, 2019, net cash used for operating activities, consisting primarily of net purchases of investments and the items described in “—Results of Operations,” was approximately $29.1 million, reflecting the purchases and repayments of investments offset by net investment income, including non-cash income related to accretion of discount and PIK income and proceeds from sales of investments and principal payments received.  Net cash provided by purchases and sales of investments was approximately $16.6 million, reflecting additional investments of $114.3 million, offset by principal repayments and sales of $97.7 million.  Such amounts include draws and repayments on revolving credit facilities.

For the six months ended June 30, 2019, net cash provided by financing activities was $27.5 million, which consisted of $40.3 million in proceeds from the GECCN Notes offering (discussed under “—Notes Payable” below) offset by $7.8 million in distributions to investors and $3.4 million in repurchases of the Company’s common stock through our current stock buyback program.

Contractual Obligations

A summary of our significant contractual payment obligations as of June 30, 2019 is as follows:

(in thousands)

 

Total

 

 

Less than

1 year

 

 

1-3 years

 

 

3-5 years

 

 

More than

5 years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GECCL Notes

 

$

32,631

 

 

$

-

 

 

$

-

 

 

$

32,631

 

 

$

-

 

GECCM Notes

 

 

46,398

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

46,398

 

GECCN Notes

 

 

42,500

 

 

 

-

 

 

 

-

 

 

 

42,500

 

 

 

-

 

Total

 

$

121,529

 

 

$

-

 

 

$

-

 

 

$

75,131

 

 

$

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.

10


 

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.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices, as of and for the three months ended June 30, 2019.

Notes Payable

On September 18, 2017, we sold $28.4 million in aggregate principal amount of 6.50% notes due 2022 (the "GECCL Notes").  On September 29, 2017, we sold an additional $4.3 million of the GECCL Notes upon full exercise of the underwriters’ over-allotment option.  As a result of the issuance of these additional GECCL Notes, the aggregate principal balance of the GECCL Notes outstanding is $32.6 million.

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

On January 11, 2018, we sold $43.0 million in aggregate principal amount of the GECCM Notes.  On January 19, 2018 and February 9, 2018, we sold an additional $1.9 million and $1.5 million, respectively, of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option.  As a result of the issuance of these additional GECCM Notes, the aggregate principal balance of the GECCM Notes outstanding is $46.4 million.

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

On June18, 2019, we sold $42.5 million in aggregate principal amount of the GECCN Notes, which included $2.5 million of GECCN Notes sold in connection with the partial exercise of the underwriters’ over-allotment option.  On July 5, 2019, we sold an additional $2.5 million of the GECCN Notes upon another partial exercise of the underwriters’ over-allotment option.  As a result of the issuance of these additional GECCN Notes, the aggregate principal balance of the GECCN Notes outstanding is $45.0 million.

The GECCN Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness.  The GECCN Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries.  We pay interest on the GECCN Notes on March 31, June 30, September 30 and December 31 of each year beginning September 30, 2019.  The GECCN Notes will mature on June 30, 2024 and can be called on, or after, June 30, 2021.  Holders of the GECCN Notes do not have the option to have the GECCN Notes repaid prior to the stated maturity date.  The GECCN Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

Recent Developments

In July 2019:

 

we bought $4.3 million of par value of California Pizza Kitchen, Inc. (“California Pizza Kitchen”) second lien secured loan at approximately 95% of par value.

11


 

 

we bought $3.0 million of par value of California Pizza Kitchen first lien secured loan at approximately 96% of par value.

 

we bought $0.3 million of par value of Peninsula Pacific Entertainment, LLC first lien secured loan at approximately 100% of par value.

 

we bought $4.0 million of par value of Shearer’s Foods, LLC second lien secured loan at approximately 99% of par value.

 

we bought $3.0 million of par value of Tensar Corp. first lien secured loan at approximately 95% of par value.

On July 5, 2019 we sold an additional $2.5 million of the GECCN Notes upon partial exercise of the underwriters’ over-allotment option.

On July 31, 2019, we completed the sale of PE Facility Solutions, LLC (“PEFS”), a majority-owned subsidiary of the Company, to Kellermeyer Bergensons Services for $23.75 million.  As of June 30, 2019, the outstanding principal amount of the Company’s senior secured revolving loan, senior secured term loan A and senior secured term loan B to PEFS was approximately $19.8 million in the aggregate.  Although PEFS was a subsidiary of the Company, the Company did not consolidate PEFS in its consolidated financial statements in accordance with GAAP.

In August 2019:

 

we bought $10.0 million of par value of Mitchell International, Inc. second lien secured loan at approximately 94% of par value.

 

we bought $3.0 million of par value of Boardriders, Inc. first lien secured loan at approximately 98% of par value.

 

$14.9 million of par value of SESAC Holdco II LLC second lien secured loan was paid down at approximately 100% of par value.

 

we bought $1.5 million of par value of ASP Chromaflo Intermediate Holdings, Inc. at approximately 99% of par value.

Our Board declared the monthly distributions for the third quarter of 2019 at an annual rate of approximately 9.7% of our June 30, 2019 net asset value, which equates to $0.083 per month.  All of the monthly distributions are from net investment income.  The schedule of distribution payments will be established by GECC pursuant to authority granted by our Board.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates.  As of June 30, 2019, four debt investments in our portfolio bore interest at a fixed rate, and the remaining 23 debt investments were at variable rates, representing approximately $44.4 million and $128.8 million in debt at fair value, respectively.  The variable rates are based upon the London Interbank Offered Rate (“LIBOR”).

To illustrate the potential impact of a change in the underlying interest rate on our net investment income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%, and 3% decrease in the underlying LIBOR, and no other change in our portfolio as of June 30, 2019.  We have also assumed that there are no outstanding floating rate borrowings by the Company.  See the following table for the effect the rate changes would have on net investment income.

LIBOR Increase (Decrease)

 

 

Increase (decrease) of Net

Investment Income

 

3.00%

 

 

$

5,899

 

2.00%

 

 

 

3,933

 

1.00%

 

 

 

1,966

 

(1.00)%

 

 

 

(1,428

)

(2.00)%

 

 

 

(2,158

)

(3.00)%

 

 

 

(2,371

)

12


 

Although we believe that this analysis is indicative of our existing interest rate sensitivity at June 30, 2019, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including borrowing under a credit facility, that could affect the net increase in net assets resulting from operations.  Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2019, we, including our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)).  Based on that evaluation, our management, including our Chief Executive Officer and Interim Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.  Legal Proceedings.

From time to time, we or GECM may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies.  There have been no material updates to the legal proceedings previously disclosed in our Form 10-K.

Item 1A.  Risk Factors.

We have disclosed the risk factors affecting our business, financial condition and/or operating results in the section entitled “Risk Factors” in our Form 10-K.  There have been no material changes from the risk factors previously disclosed.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Common stock repurchases during the three months ended June 30, 2019 were:

Month

 

Total Number of

Shares Purchased

 

 

Average Price Per

Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Program

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program

(in thousands)

 

April 1-30, 2019

 

 

116,883

 

 

$

8.26

 

 

 

308,883

 

 

$

2,437

 

May 1-31, 2019

 

 

277,044

 

 

 

8.65

 

 

 

585,927

 

 

 

33

 

June 1-30, 2019

 

 

3,792

 

 

 

8.71

 

 

 

589,719

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

397,719

 

 

$

8.54

 

 

 

589,719

 

 

$

-

 

13


 

In March 2019, we implemented a stock buyback program pursuant to Rule 10b5-1 and Rule 10b-18 under the Exchange Act authorizing us to repurchase our common stock in open market transactions in an aggregate amount of up to $5.0 million through December 2019, unless extended or terminated by our Board.  During the three months ended June 30, 2019, we purchased 397,719 shares of our common stock.

There were no unregistered sales of our equity securities during the three months ended June 30, 2019.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

Not applicable.

14


 

Item 6.  Exhibits.

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

Exhibit

Number

 

Description

 

 

 

 

 

 

  2.1

 

Agreement and Plan of Merger, dated as of June 23, 2016, by and between Full Circle Capital Corporation and the Registrant (incorporated by reference to the Rule 425 filing (File No. 814-00809) on June 27, 2016)

 

 

 

  2.2

 

Subscription Agreement, dated as of June 23, 2016, by and among the Registrant, Great Elm Capital Group, Inc.  and the investment funds signatory thereto (incorporated by reference to the Rule 425 filing (File No. 814-00809) on June 27, 2016)

 

 

 

  3.1

 

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

 

 

 

  3.2

 

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

 

 

 

  4.1

 

Form of certificate for the Registrant’s common stock (incorporated by reference to Exhibit 5 to the Registration Statement on Form N-14 (File No. 333-212817) filed on August 1, 2016)

 

 

 

  4.2

 

Indenture, dated as of September 18, 2017, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as trustee (the “Trustee”) (incorporated by reference to Exhibit 4.1 to the Form 8-K/A filed on September 21, 2017)

 

 

 

  4.3

 

First Supplemental Indenture, dated as of September 18, 2017, by and between the Registrant and the Trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K/A filed on September 21, 2017)

 

 

 

  4.4

 

Global Note, dated September 18, 2017 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 19, 2017, as amended September 21, 2017)

 

 

 

  4.5

 

Global Note, dated September 29, 2017 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 29, 2017)

 

 

 

  4.6

 

Second Supplemental Indenture, dated as of January 19, 2018, by and between the Registrant and the Trustee (incorporated by reference to Exhibit (d)(3) to the post-effective amendment to the Registration Statement on Form N-2 (File No.  333-221882) filed on January 19, 2018)

 

 

 

  4.7

 

Global Note, dated January 19, 2018 (incorporated by reference to Exhibit (d)(1) to the post-effective amendment to the Registration Statement on Form N-2 (File No.  333-221882) filed on January 19, 2018)

 

 

 

  4.8

 

Third Supplemental Indenture, dated as of June 18, 2019, by and between the Registrant and the Trustee (incorporated by reference to Exhibit (d)(3) to the post-effective amendment to the Registration Statement on Form N-2 (File No. 333-227605) filed on June 18, 2019

 

 

 

  4.9

 

Global Note, dated June 18, 2019 (incorporated by reference to Exhibit (d)(1) to the post-effective amendment to the Registration Statement on Form N-2 (File No. 333-227605) filed on June 18, 2019)

 

 

 

  31.1*

 

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

 

 

 

  31.2*

 

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

 

 

 

  32.1*

 

Certification of the Registrant’s CEO and CFO

 

*

Filed herewith

15


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

GREAT ELM CAPITAL CORP.

 

 

 

 

Date:  August 13, 2019

 

By:

/s/ Peter A.  Reed

 

 

Name:

Peter A.  Reed

 

 

Title:

Chief Executive Officer

 

 

 

 

Date:  August 13, 2019

 

By:

/s/ Keri A. Davis

 

 

Name:

Keri A. Davis

 

 

Title:

Interim Chief Financial Officer

 

 

 

16


 

GREAT ELM CAPITAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Statements of Assets and Liabilities as of June 30, 2019 and December 31, 2018 (unaudited)

 

F-2

Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited)

 

F-3

Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2019 and 2018 (unaudited)

 

F-4

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

 

F-5

Consolidated Schedule of Investments as of June 30, 2019 and December 31, 2018 (unaudited)

 

F-6

Notes to the Unaudited Consolidated Financial Statements

 

F-14

 

F-1


 

GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)

Dollar amounts in thousands (except per share amounts)

 

 

June 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

Non-affiliated, non-controlled investments, at fair value

   (amortized cost of $144,040 and $137,852, respectively)

 

$

135,222

 

 

$

128,318

 

Non-affiliated, non-controlled short-term investments, at fair value

   (amortized cost of $124,914 and $78,093, respectively)

 

 

124,908

 

 

 

78,085

 

Affiliated investments, at fair value

   (amortized cost of $97,833 and $89,854, respectively)

 

 

40,074

 

 

 

35,665

 

Controlled investments, at fair value

   (amortized cost of $29,622 and $20,648, respectively)

 

 

28,922

 

 

 

20,203

 

Total investments

 

 

329,126

 

 

 

262,271

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

2,543

 

 

 

4,167

 

Receivable for investments sold

 

 

25

 

 

 

10,887

 

Interest receivable

 

 

2,190

 

 

 

3,255

 

Dividends receivable

 

 

57

 

 

 

9

 

Due from portfolio company

 

 

591

 

 

 

555

 

Due from affiliates

 

 

15

 

 

 

5

 

Prepaid expenses and other assets

 

 

10

 

 

 

414

 

Total assets

 

$

334,557

 

 

$

281,563

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Notes payable 6.50% due September 18, 2022 (including unamortized discount

   of $994 and $1,141, respectively)

 

$

31,637

 

 

$

31,490

 

Notes payable 6.75% due January 31, 2025 (including unamortized discount

   of $1,452 and $1,588, respectively)

 

 

44,947

 

 

 

44,811

 

Notes payable 6.50% due June 30, 2024 (including unamortized discount

   of $2,200 and $0, respectively)

 

 

40,300

 

 

 

-

 

Payable for investments purchased

 

 

104,109

 

 

 

84,102