gecc-10q_20200930.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 September 30, 2020

or

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

 

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 November 4, 2020, the registrant had 21,975,334 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

2

Item 2.

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

2

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

14

Item 4.

Controls and Procedures

14

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

Item 3.

Defaults Upon Senior Securities

15

Item 4.

Mine Safety Disclosures

15

Item 5.

Other Information

15

Item 6.

Exhibits

16

 

Signatures

17

 

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-7

 

Notes to the Unaudited Consolidated Financial Statements

F-15

 

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, 2019 (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.

Cautionary Note Regarding Forward-Looking Information

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

 

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

 

the return or impact of current and future investments;

 

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

 

the impact of fluctuations in interest rates on our business;

 

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

 

our contractual arrangements and relationships with third parties;

 

our current and future management structure;

 

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;

 

serious disruptions and catastrophic events, including the impact of the Coronavirus Disease 2019 (“COVID-19”) pandemic on the global economy;

 

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;

 

the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and

 

our ability to maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“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 report involve risks and uncertainties.  Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth under “Item 1A.  Risk Factors.”

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

1


 

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 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 which are traded in the institutional 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 senior secured loans, junior loans and mezzanine debt.  We will from time to time make investments in preferred equity, control equity investments in specialty finance businesses and equity investments as part of restructuring credits.

On September 27, 2016, we and Great Elm Capital Management, Inc.  (“GECM”), our external investment 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 as well as the competitive environment for the types of investments we make.  As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements.

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 payment-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.

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.

2


 

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.  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.

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.

Both observable and unobservable inputs are subject to some level of uncertainty and assumptions used bear the risk of change in the future.  We utilize the best information available to us, including the factors listed above, in preparing the fair valuations.  In determining the fair value of any individual investment, we may use multiple inputs or utilize more than one approach to calculate the fair value to assess the sensitivity to change and determine a reasonable range of fair value.  In addition, our valuation procedures include an assessment of the current valuation as compared to the previous valuation for each investment and where differences are material understanding the primary drivers of those changes, incorporating updates to our current valuation inputs and approaches as appropriate.

3


 

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.

We assess the outstanding accrued income receivables for collectability at least quarterly, or more frequently if there is an event that indicates the underlying portfolio company may not be able to make the expect payments.  If it is determined that amounts are not likely to be paid we may establish a reserve against or reverse the income and put the investment on non-accrual status.

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 specific identification 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.

4


 

Portfolio and Investment Activity

The following is a summary of our investment activity for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020:

(in thousands)

 

Acquisitions(1)

 

 

Dispositions(2)

 

 

Weighted Average Yield

End of Period(3)

 

Quarter ended March 31, 2018

 

$

63,220

 

 

$

(29,069

)

 

 

14.80

%

Quarter ended June 30, 2018

 

 

37,927

 

 

 

(27,729

)

 

 

11.10

%

Quarter ended September 30, 2018

 

 

38,969

 

 

 

(37,991

)

 

 

11.60

%

Quarter ended December 31, 2018

 

 

34,849

 

 

 

(40,028

)

 

 

12.00

%

For the year ended December 31, 2018

 

 

174,965

 

 

 

(134,817

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

54,846

 

 

 

(59,869

)

 

 

11.30

%

Quarter ended June 30, 2019

 

 

62,238

 

 

 

(37,802

)

 

 

11.40

%

Quarter ended September 30, 2019

 

 

45,873

 

 

 

(44,531

)

 

 

11.00

%

Quarter ended December 31, 2019

 

 

14,800

 

 

 

(9,616

)

 

 

10.80

%

For the year ended December 31, 2019

 

 

177,757

 

 

 

(151,818

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2020

 

 

31,882

 

 

 

(29,420

)

 

 

10.00

%

Quarter ended June 30, 2020

 

 

15,913

 

 

 

(37,497

)

 

 

10.18

%

Quarter ended September 30, 2020

 

 

34,495

 

 

 

(18,037

)

 

 

10.07

%

For the Nine Months Ended September 30, 2020

 

$

82,290

 

 

$

(84,954

)

 

 

 

 

(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 yield is based upon the stated coupon rate and fair 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.

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the nine months ended September 30, 2020 and the year ended December 31, 2019.  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 Nine Months Ended September 30, 2020

 

 

For the Year Ended December 31, 2019

 

 

Beginning Investment Portfolio, at fair value

 

$

197,615

 

 

$

184,186

 

 

Portfolio Investments acquired(1)

 

 

82,290

 

 

 

177,757

 

 

Amortization of premium and accretion of discount, net

 

 

3,583

 

 

 

5,982

 

 

Portfolio Investments repaid or sold(2)

 

 

(84,954

)

 

 

(151,818

)

 

Net change in unrealized appreciation (depreciation) on investments

 

 

(17,298

)

 

 

(19,792

)

 

Net realized gain (loss) on investments

 

 

(11,750

)

 

 

1,300

 

 

Ending Investment Portfolio, at fair value

 

$

169,486

 

 

$

197,615

 

 

(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).  

5


 

Portfolio Classification

The following table shows the fair value of our portfolio of investments by industry as of September 30, 2020 and December 31, 2019 (in thousands):

 

 

September 30, 2020

 

 

December 31, 2019

 

Industry

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Wireless Telecommunications Services

 

$

39,334

 

 

 

23.21

%

 

$

40,578

 

 

 

20.53

%

Specialty Finance

 

 

19,423

 

 

 

11.46

%

 

 

7,726

 

 

 

3.91

%

Internet Media

 

 

18,157

 

 

 

10.71

%

 

 

15,923

 

 

 

8.06

%

Construction Materials Manufacturing

 

 

16,220

 

 

 

9.57

%

 

 

7,792

 

 

 

3.94

%

Oil & Gas

 

 

12,710

 

 

 

7.50

%

 

 

-

 

 

 

-

%

Retail

 

 

9,472

 

 

 

5.59

%

 

 

13,470

 

 

 

6.82

%

Food & Staples

 

 

8,189

 

 

 

4.83

%

 

 

20,975

 

 

 

10.61

%

Restaurants

 

 

7,907

 

 

 

4.67

%

 

 

11,972

 

 

 

6.06

%

Software Services

 

 

6,583

 

 

 

3.88

%

 

 

25,456

 

 

 

12.88

%

Radio Broadcasting

 

 

5,393

 

 

 

3.18

%

 

 

7,795

 

 

 

3.94

%

Apparel & Textile Products

 

 

5,062

 

 

 

2.99

%

 

 

8,744

 

 

 

4.42

%

Chemicals

 

 

4,550

 

 

 

2.67

%

 

 

6,917

 

 

 

3.50

%

Industrial

 

 

3,120

 

 

 

1.84

%

 

 

4,200

 

 

 

2.13

%

Transportation Equipment Manufacturing

 

 

2,904

 

 

 

1.71

%

 

 

-

 

 

 

-

%

Hotel Operator

 

 

2,894

 

 

 

1.71

%

 

 

3,361

 

 

 

1.70

%

Technology

 

 

2,776

 

 

 

1.64

%

 

 

-

 

 

 

-

%

Metals & Mining

 

 

2,078

 

 

 

1.23

%

 

 

-

 

 

 

-

%

Communications Equipment

 

 

2,006

 

 

 

1.18

%

 

 

-

 

 

 

-

%

Real Estate Services

 

 

500

 

 

 

0.30

%

 

 

2,065

 

 

 

1.04

%

Consumer Finance

 

 

343

 

 

 

0.20

%

 

 

1,050

 

 

 

0.53

%

Building Cleaning and Maintenance Services

 

 

162

 

 

 

0.10

%

 

 

819

 

 

 

0.41

%

Maritime Security Services

 

 

30

 

 

 

0.02

%

 

 

30

 

 

 

0.02

%

Gaming, Lodging & Restaurants

 

 

-

 

 

 

-

%

 

 

12,127

 

 

 

6.14

%

Water Transport

 

 

-

 

 

 

-

%

 

 

8,001

 

 

 

4.05

%

Consulting

 

 

-

 

 

 

-

%

 

 

(458

)

 

 

(0.23

)%

Telecommunications Services

 

 

(327

)

 

 

(0.19

)%

 

 

(928

)

 

 

(0.47

)%

Total

 

$

169,486

 

 

 

100.00

%

 

$

197,615

 

 

 

99.99

%

Results of Operations

This “—Results of Operations” discussion should be read in conjunction with the discussion of (“COVID-19”) under “—Recent Developments—COVID 19”.

Investment Income

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Total Investment Income

 

$

5,951

 

 

$

0.56

 

 

$

7,002

 

 

$

0.70

 

 

$

17,148

 

 

$

1.66

 

 

$

20,026

 

 

$

1.94

 

Interest income

 

 

4,375

 

 

 

0.41

 

 

 

6,200

 

 

 

0.62

 

 

 

14,546

 

 

 

1.41

 

 

 

17,584

 

 

 

1.71

 

Dividend income

 

 

1,281

 

 

 

0.12

 

 

 

676

 

 

 

0.07

 

 

 

2,164

 

 

 

0.21

 

 

 

1,687

 

 

 

0.16

 

Other income

 

 

295

 

 

 

0.03

 

 

 

126

 

 

 

0.01

 

 

 

438

 

 

 

0.04

 

 

 

755

 

 

 

0.07

 

(1)

The per share amounts are based on a weighted average of 10,660,894 and 10,307,771 outstanding common shares for the three and nine months ended September 30, 2020, respectively.

(2)

The per share amounts are based on a weighted average of 10,062,682 and 10,312,561 outstanding common shares for the three and nine months ended September 30, 2019, respectively.

6


 

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.  For the three and nine months ended September 30, 2020, interest income includes non-cash PIK income of $1.3 million and $3.8 million, respectively. For the three and nine months ended September 30, 2019, interest income includes non-cash PIK income of $1.2 million and $3.6 million, respectively.

Interest income decreased for the three and nine months ended September 30, 2020 as compared to the corresponding periods in the prior year due to exits from certain high income-generating positions, such as PE Facility Solutions, LLC (“PEFS”), and SESAC Holdco II LLC (“SESAC”) in the third quarter of 2019 and Commercial Barge Line Company (“Commercial Barge”) in the first quarter of 2020, as well as general downward trends in the London Interbank Offered Rate (“LIBOR”), the primary base rate referenced in our floating rate debt investments.  In addition, during the nine months ended September 30, 2020, several investments, including Davidzon Radio, Inc., PFS Holdings Corp. (“PFS”) and California Pizza Kitchen (“CPK”) 2nd lien loan, were put on nonaccrual status resulting in lower interest income for the current period than if interest payments had continued per the terms of each respective loan.  Investments are expected to remain on non-accrual status absent an indication that interest payments will resume in the future.

Dividend income has increased for the three and nine months ended September 30, 2020 as a result of increased dividend payments from our investment in Prestige Capital Finance, LLC.

The decrease in other income for the nine months ended September 30, 2020 as compared to the corresponding period 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.

As discussed under “—Recent Developments”, the full impact of COVID-19 on each of our portfolio companies is not known at this time.  Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and may be unable to make future interest payments or dividend distributions resulting in decreased income to the Company.  In addition, the three and nine months ended September 30, 2020 saw significant decreases in LIBOR, the primary base rate referenced in our floating rate debt investments.  If interest rates stay depressed or continue to decrease further and we are otherwise unable to offset these reductions by investing in other debt instruments with higher interest rates we will see further decreases in our investment income.

Expenses

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Total Expenses

 

$

4,018

 

 

$

0.38

 

 

$

4,383

 

 

$

0.44

 

 

$

11,647

 

 

$

1.13

 

 

$

11,628

 

 

$

1.13

 

Management fees

 

 

609

 

 

 

0.06

 

 

 

759

 

 

 

0.08

 

 

 

1,898

 

 

 

0.18

 

 

 

2,207

 

 

 

0.21

 

Incentive fees

 

 

482

 

 

 

0.05

 

 

 

654

 

 

 

0.06

 

 

 

810

 

 

 

0.08

 

 

 

2,099

 

 

 

0.20

 

Total advisory and management fees

 

$

1,091

 

 

$

0.11

 

 

$

1,413

 

 

$

0.14

 

 

$

2,708

 

 

$

0.26

 

 

$

4,306

 

 

$

0.42

 

Administration fees

 

 

152

 

 

 

0.01

 

 

 

282

 

 

 

0.03

 

 

 

547

 

 

 

0.05

 

 

 

734

 

 

 

0.07

 

Directors’ fees

 

 

49

 

 

 

0.00

 

 

 

51

 

 

 

0.01

 

 

 

151

 

 

 

0.01

 

 

 

150

 

 

 

0.01

 

Interest expense

 

 

2,225

 

 

 

0.21

 

 

 

2,308

 

 

 

0.23

 

 

 

6,920

 

 

 

0.67

 

 

 

5,333

 

 

 

0.52

 

Professional services

 

 

287

 

 

 

0.03

 

 

 

243

 

 

 

0.02

 

 

 

794

 

 

 

0.08

 

 

 

711

 

 

 

0.07

 

Custody fees

 

 

20

 

 

 

0.00

 

 

 

15

 

 

 

0.00

 

 

 

59

 

 

 

0.01

 

 

 

45

 

 

 

0.00

 

Other

 

 

194

 

 

 

0.02

 

 

 

71

 

 

 

0.01

 

 

 

468

 

 

 

0.05

 

 

 

349

 

 

 

0.03

 

(1)

The per share amounts are based on a weighted average of 10,660,894 and 10,307,771 outstanding common shares for the three and nine months ended September 30, 2020, respectively.

(2)

The per share amounts are based on a weighted average of 10,062,682 and 10,312,561 outstanding common shares for the three and nine months ended September 30, 2019, respectively.

7


 

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.

Overall expenses for the three months ended September 30, 2020 decreased as compared to the three months ended September 30, 2019 primarily due to decreases in incentive fees and management fees. For the nine months ended September 30, 2020 overall expenses were consistent with the nine months ended September 30, 2019, with decreases in management and incentive fees offset by increases in interest expense.  The increase in interest expense for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 is due to the issuance of $45.0 million in aggregate principal amount of 6.50% notes due 2024 (the “GECCN Notes”) in June and July 2019 which resulted in a weighted average outstanding debt balance of $119.1 million and $121.8 million for the three and nine months ended September 30, 2020, respectively, as compared to $123.9 million and $96.2 million for the three and nine months ended September 30, 2019, respectively.

The decrease in incentive fees for the three and nine months ended September 30, 2020 as compared to the corresponding periods in the prior year is the result of decreases in pre-incentive fee net investment income as a result of the decreased investment income discussed under “—Investment Income” above and the increase in interest expense.  In addition, incentive fees for the nine months ended September 30, 2020 included a reversal of approximately $0.4 million in incentive fees accrued in prior periods.  This reversal was primarily attributable to the sale of Commercial Barge in February 2020, for which the resulting proceeds did not fully cover the accreted cost of the investment.  Excluding the impact of the reversal, incentive fees would have been approximately $0.6 million for the three months ended March 31, 2020.

Realized Gains (Losses)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Net Realized Gain (Loss)

 

$

(142

)

 

$

(0.02

)

 

$

251

 

 

$

0.02

 

 

$

(10,523

)

 

$

(1.02

)

 

$

1,269

 

 

$

0.12

 

Gross realized gain

 

 

361

 

 

 

0.03

 

 

 

252

 

 

 

0.03

 

 

 

2,248

 

 

 

0.22

 

 

 

2,096

 

 

 

0.20

 

Gross realized loss

 

 

(503

)

 

 

(0.05

)

 

 

(1

)

 

 

(0.00

)

 

 

(12,771

)

 

 

(1.24

)

 

 

(827

)

 

 

(0.08

)

(1)

The per share amounts are based on a weighted average of 10,660,894 and 10,307,771 outstanding common shares for the three and nine months ended September 30, 2020, respectively.

(2)

The per share amounts are based on a weighted average of 10,062,682 and 10,312,561 outstanding common shares for the three and nine months ended September 30, 2019, respectively.

During the three months ended September 30, 2020, net realized losses were primarily driven by the realized losses of approximately $0.3 million on the APTIM Corp. 1st lien bond (“APTIM”) during the quarter. Realized gains for the three months ended September 30, 2020 includes approximately $0.1 million in realized gain on repurchases of debt below par. During the nine months ended September 30, 2020, net realized losses on investments were primarily driven by the sales of Commercial Barge and Full House Resorts, Inc. (“Full House”) during the period, for which we recognized realized losses of $9.8 million and $1.3 million, respectively. Realized gains for the nine months ended September 30, 2020 includes approximately $1.2 million in realized gain on repurchases of debt below par.

During the three months ended September 30, 2019, net realized gains were primarily driven by realized gains of approximately $0.2 million on the partial repayment of our investment in PEFS first lien secured loan B and approximately $0.1 million on the sale of our investment in SESAC second lien secured loan. During the nine months ended September 30, 2019, net realized gains were largely driven by the sales of our investments in International Wire Group, Inc. (“International Wire”) and Michael Baker International, LLC secured bonds which resulted in realized gains of approximately $1.1 million and $0.4 million, respectively.  These realized gains were partially offset by gross realized losses for the nine months ended September 30, 2019 which 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 loan.

8


 

Unrealized Appreciation (Depreciation) on Investments

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

 

In Thousands

 

 

Per Share(1)

 

 

In Thousands

 

 

Per Share(2)

 

Net unrealized appreciation/ (depreciation)

 

$

5,913

 

 

$

0.56

 

 

$

(12,516

)

 

$

(1.24

)

 

$

(17,301

)

 

$

(1.68

)

 

$

(15,623

)

 

$

(1.51

)

Unrealized appreciation

 

 

8,940

 

 

 

0.84

 

 

 

974

 

 

 

0.10

 

 

 

12,036

 

 

 

1.17

 

 

 

3,871

 

 

 

0.38

 

Unrealized depreciation

 

 

(3,027

)

 

 

(0.28

)

 

 

(13,490

)

 

 

(1.34

)

 

 

(29,337

)

 

 

(2.85

)

 

 

(19,494

)

 

 

(1.89

)

 

(1)

The per share amounts are based on a weighted average of 10,660,894 and 10,307,771 outstanding common shares for the three and nine months ended September 30, 2020, respectively.

(2)

The per share amounts are based on a weighted average of 10,062,682 and 10,312,561 outstanding common shares for the three and nine months ended September 30, 2019, respectively.

During the three months ended September 30, 2020, we recognized unrealized appreciation of approximately $2.0 million on our investment in Prestige Capital Finance, LLC common equity and approximately $1.1 million on our investment in APTIM 1st lien bond. We recognized unrealized depreciation of approximately $1.2 million on our position in Boardriders, Inc.

During the nine months ended September 30, 2020, net unrealized depreciation was largely driven by decreases in portfolio company valuations as compared to the prior year end.  Most notably, we recognized unrealized depreciation of approximately $4.8 million on our investment in Avanti Communications Group, plc (“Avanti”) 2nd lien secured bond, approximately $3.6 million on our investment in Boardriders, Inc. 1st lien loan and approximately $5.2 million and $3.3 million on our investment in CPK 1st lien loan and 2nd lien loan, respectively.

Unrealized appreciation for the nine months ended September 30, 2020 was primarily due to the sale of Commercial Barge in February 2020, for which we realized approximately $6.3 million of previously unrealized losses.

For each of the three and nine months ended September 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. Net unrealized depreciation for the nine months ended September 30, 2019 included unrealized depreciation of $7.7 million, $3.7 million and $1.9 million on our investments in Avanti debt and equity, Commercial Barge and PFS, respectively.  For the three months ended September 30, 2019, net unrealized depreciation included unrealized depreciation of $4.1 million, $2.5 million and $2.3 million on our investments in Avanti debt and equity, Tru Taj, LLC (“Tru Taj”) common equity and Commercial Barge, respectively.  The unrealized depreciation on our investments in Commercial Barge and PFS includes decreases in the fair value of each investment and increases in our cost basis as a result of the accretion of OID.

For the nine months ended September 30, 2019, unrealized depreciation was partially offset by unrealized appreciation of $0.5 million and $0.3 million on our investments in Finastra Group Holdings, Ltd. and Research Now Group, Inc. revolver, respectively, as a result of increases in fair value and unrealized appreciation of $1.0 million and $0.4 million on our investments in International Wire and SESAC, respectively, as a result of realization events during the period.

As discussed under “—Recent Developments”, we cannot predict the duration of the COVID-19 pandemic and the resulting impact to our individual portfolio companies or the broader market.  It is likely that any recovery may be slow and/or volatile.  The current unrealized depreciation on our portfolio may not be reversed in the short-term or at all and we may see further declines in fair value before the pandemic is over.

9


 

Liquidity and Capital Resources

This “—Liquidity and Capital Resources” discussion should be read in conjunction with the discussion of COVID-19 under “—Recent Developments—COVID 19”.

At September 30, 2020, we had approximately $12.6 million of cash and cash equivalents and $0.6 million of restricted cash.

At September 30, 2020, we had investments in 34 debt instruments across 25 companies, totaling approximately $136.1 million at fair value and eight equity investments in seven companies, totaling approximately $33.4 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 September 30, 2020, we had approximately $46.2 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 September 30, 2020 balance sheet to satisfy the unfunded commitments.

For the nine months ended September 30, 2020, net cash provided by operating activities was approximately $17.2 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 proceeds from sales of investments was approximately $8.3 million, reflecting payments for additional investments of $75.1 million, offset by proceeds from principal repayments and sales of $83.4 million.  Such amounts include draws and repayments on revolving credit facilities.

For the nine months ended September 30, 2020, net cash used for financing activities was $8.6 million, which consisted of $4.5 million in distributions to investors and $4.1 million in repurchases of our debt.

Contractual Obligations

A summary of our significant contractual payment obligations as of September 30, 2020 is as follows:

(in thousands)

 

Total

 

 

Less than

1 year

 

 

1-3 years

 

 

3-5 years

 

 

More than

5 years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GECCL Notes

 

$

30,293

 

 

$

-

 

 

$

30,293

 

 

$

-

 

 

$

-

 

GECCM Notes

 

 

45,610

 

 

 

-

 

 

 

-

 

 

 

45,610

 

 

 

-

 

GECCN Notes

 

 

42,823

 

 

 

-

 

 

 

-

 

 

 

42,823

 

 

 

-

 

Total

 

$

118,726

 

 

$

-

 

 

$

30,293

 

 

$

88,433

 

 

$

-

 

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.

10


 

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 September 30, 2020.

Notes Payable

On September 13, 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.  The aggregate principal balance of the GECCL Notes outstanding as of September 30, 2020 is $30.3 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 6.75% notes due 2025 (the “GECCM Notes” and, together with the GECCL Notes and GECCM Notes, the “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.  The aggregate principal balance of the GECCM Notes outstanding as of September 30, 2020 is $45.6 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 June 18, 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.  The aggregate principal balance of the GECCN Notes outstanding as of September 30, 2020 is $42.8 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.

We may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder.  During the nine months ended September 30, 2020, we repurchased $2.3 million in principal amount of the GECCL Notes $0.8 million in principal amount of the GECCM Notes and $2.2 million in principal amount of the GECCN Notes.

As of September 30, 2020, our asset coverage ratio was approximately 150.9%.  We are subject to a minimum asset coverage ratio of 150%.

11


 

Recent Developments

On October 1, 2020, we announced the final results of our non-transferable rights offering, which entitled holders of rights to purchase one new share of common stock for each right held at a subscription price of $2.95 per share.  In total, we sold 10,761,950 shares of our common stock for aggregate gross proceeds of approximately $31.7 million.

Our Board set distributions for the quarter ending March 31, 2021 at a rate of $0.10 per quarter.  All of the distribution is from net investment income.  The schedule of distribution payment will be established by GECC pursuant to authority granted by our Board.  The distribution will be paid in cash.

In October 2020:

 

we purchased 43,993 preferred shares in Blueknight Energy Partners L.P. (“Blueknight”) for approximately $0.3 million.

 

we purchased $1.0 million in par value of Peninsula Pacific Entertainment, LLC (“Pacific Peninsula”) secured bonds at 100% of par value.

 

we sold $1.0 million in par value of Peninsula Pacific secured bonds at approximately 103% of par value.

 

we purchased $2.0 million in par value of Natural Resource Partners, L.P. unsecured bonds at approximately 90% of par value.

 

$2.0 million of par value of Viasat, Inc. receivable was redeemed at 100% of par value.

 

we purchased $3.0 million in par value of Viasat, Inc. receivable at 90% of par value.

 

we purchased $1.0 million in par value of Cars.com, Inc. secured bonds at 100% of par value.

 

we sold $1.0 million in par value of Cars.com, Inc. unsecured bonds at 100% of par value.

 

we purchased $0.2 million in par value of CPK second lien term loan at approximately 1% of par value.

 

we purchased $2.0 million in par value of Par Petroleum, LLC secured bonds at approximately 81% of par value.

In November 2020:

 

we purchased 30,000 preferred shares in Blueknight for approximately $0.2 million.

COVID-19

The global outbreak of the COVID-19 has disrupted economic markets and the economic impact, duration and spread of the COVID-19 virus is uncertain at this time.  The operational and financial performance of some of the portfolio companies in which we make investments has been and may further be significantly impacted by COVID-19, which may in turn impact the valuation of our investments, results of our operations and cash flows.

Our investment manager prioritizes the health and safety of employees and in early March 2020, GECM moved to a remote-working model for all employees.  In addition, the officers of GECC have maintained regular communications with key service providers, including the fund administration, legal and accounting professionals, noting that those firms have similarly moved to remote-working models to the extent possible.  Our employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary.

While we have been carefully monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies, we have continued to fund our existing debt commitments. In addition, we have continued to make, and expect to continue to make, new investments.

12


 

We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition. Our portfolio is diversified across multiple industries and the direct and indirect impacts of the COVID-19 pandemic will be dependent on the specific circumstances for each portfolio company.  For example, companies that derive revenues through in-person interactions with customers, such as restaurants and retail stores, have been and may be subject to reduced capacity or shutdowns based on local government advisories and regulations.  For example, CPK filed for bankruptcy in July 2020.  Other companies may be better able to adapt to the changing environment by moving their workforce to a remote-working model and leveraging technology solutions to interact with customers.

Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies may experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company.

The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies may have material adverse effects on our investment income, particularly our interest income, received from our investments. In connection with the adverse effects of the COVID-19 pandemic, we may need to restructure our investments in some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive, or result in permanent write-downs on our investments.

We have had a significant reduction in our net asset value as of September 30, 2020 as compared to our net asset value as of December 31, 2019. The decrease in net asset value as of September 30, 2020 was largely the result of decreases in the fair value of some of our portfolio company investments primarily due to the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact, as well as the re-pricing of credit risk in the broadly syndicated credit market.

We are also subject to financial risks, including changes in market interest rates. As of September 30, 2020, approximately $142.4 million in principal amount of our debt investments bore interest at variable rates, which are generally based on LIBOR, and many of which are subject to certain floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments or a decrease in our operating expenses. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for an analysis of the impact of hypothetical base rate changes in interest rates.

We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. To the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, its financial condition and the results of operations and financial condition of our portfolio companies.

13


 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates.  As of September 30, 2020, ten debt investments in our portfolio bore interest at a fixed rate, and the remaining 24 debt investments were at variable rates, representing approximately $95.5 million and $142.4 million in principal debt, respectively.  As of December 31, 2019, five debt investments in our portfolio bore interest at a fixed rate, and the remaining 23 debt investments were at variable rates, representing approximately $71.9 million and $174.3 million in principal debt, respectively.  The variable rates are based upon the 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 September 30, 2020.  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

(in thousands)(1)

 

3.00%

 

 

$

2,351

 

2.00%

 

 

 

1,567

 

1.00%

 

 

 

784

 

(1.00)%

 

 

 

(39

)

(2.00)%

 

 

 

(39

)

(3.00)%

 

 

 

(39

)

 

(1)

Several of our debt investments with variable rates contain a LIBOR floor.  The actual increase (decrease) of net investment income reflected in the table above takes into account such LIBOR floors to the extent applicable.

Although we believe that this analysis is indicative of our existing interest rate sensitivity at September 30, 2020, 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 (decrease) in net assets resulting from operations.  Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

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

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2020, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)).  Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the 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 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.

14


 

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 September 30, 2020 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, our investment adviser or administrator may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies.  There have been no material updates to the legal proceedings previously disclosed in our Form 10-K.

Item 1A.  Risk Factors.

There have been no material changes in risk factors in the period covered by this report.  See discussion of risk factors in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the six months ended June 30, 2020.

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

Not applicable.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

Not applicable.

15


 

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

16


 

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:  November 9, 2020

 

By:

/s/ Peter A.  Reed

 

 

Name:

Peter A.  Reed

 

 

Title:

Chief Executive Officer

 

 

 

 

Date:  November 9, 2020

 

By:

/s/ Keri A. Davis

 

 

Name:

Keri A. Davis

 

 

Title:

Chief Financial Officer

 

 

 

17


 

GREAT ELM CAPITAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Statements of Assets and Liabilities as of September 30, 2020 and December 31, 2019 (unaudited)

 

F-2

Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

 

F-3

Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 and 2019 (unaudited)

 

F-4

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

 

F-5

Consolidated Schedule of Investments as of September 30, 2020 and December 31, 2019 (unaudited)

 

F-7

Notes to the Unaudited Consolidated Financial Statements

 

F-15

 

F-1


 

GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)

Dollar amounts in thousands (except per share amounts)

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

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

   (amortized cost of $144,747 and $168,269, respectively)

 

$

110,194

 

 

$

147,412

 

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

   (amortized cost of $74,983 and $85,733, respectively)

 

 

74,980

 

 

 

85,733

 

Affiliated investments, at fair value

   (amortized cost of $107,256 and $102,704, respectively)

 

 

39,364

 

 

 

40,608

 

Controlled investments, at fair value

   (amortized cost of $18,740 and $10,601, respectively)

 

 

19,928

 

 

 

9,595

 

Total investments

 

 

244,466

 

 

 

283,348

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

12,570

 

 

 

4,606

 

Restricted cash

 

 

600

 

 

 

-

 

Receivable for investments sold

 

 

1,531

 

 

 

-

 

Interest receivable

 

 

4,091

 

 

 

2,350

 

Dividends receivable

 

 

-

 

 

 

14

 

Due from portfolio company

 

 

750

 

 

 

617

 

Due from affiliates

 

 

-

 

 

 

15

 

Prepaid expenses and other assets

 

 

497

 

 

 

89

 

Total assets

 

$

264,505

 

 

$

291,039

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

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

   of $566 and $839, respectively)

 

$

29,727

 

 

$

31,792

 

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

   of $1,107 and $1,321, respectively)

 

 

44,503

 

 

 

45,078

 

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

   of $1,639 and $2,058, respectively)

 

 

41,184

 

 

 

42,942

 

Payable for investments purchased

 

 

77,120

 

 

 

72,749

 

Interest payable

 

 

366

 

 

 

354

 

Distributions payable

 

 

908

 

 

 

1,338

 

Accrued incentive fees payable

 

 

8,967

 

 

 

8,157

 

Due to affiliates

 

 

781

 

 

 

997

 

Accrued expenses and other liabilities

 

 

485

 

 

 

743

 

Total liabilities

 

$

204,041

 

 

$

204,150