gecc-10q_20170630.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2017

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

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

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

 

The registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934     

 

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 7(a)(2)(B) of the Securities Act.      

 

As of August 11, 2017, the registrant had 11,502,547 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

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

11

Item 4.

Controls and Procedures

12

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

12

Item 1A.

Risk Factors

12

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

13

Item 3.

Defaults Upon Senior Securities

13

Item 4.

Mine Safety Disclosures

13

Item 5.

Other Information

13

Item 6.

Exhibits

13

 

Signatures

14

 

Index to Financial Statements

F-1

 

Consolidated Statements of Assets and Liabilities

F-2

 

Condensed Consolidated Statements of Operations (unaudited)

F-3

 

Consolidated Statement of Changes in Net Assets (unaudited)

F-4

 

Condensed Consolidated Statements of Cash Flows (unaudited)

F-5

 

Consolidated Schedules of Investments

F-6

 

Notes to Unaudited Condensed Consolidated Financial Statements

F-16

 

Exhibit Index

 

 

 

 

 

 

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.  All dollar amounts, other than per share amounts, are disclosed in thousands unless otherwise noted.

Item 1. Financial Statements.

The financial statements listed in the index to 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. Our investment focus is on debt obligations of middle-market companies.  We invest primarily in the debt of middle-market companies as well as small businesses, generally in the form of senior secured and unsecured notes, as well as in senior secured loans, junior loans and mezzanine debt. We will from time to time make equity investments as part of restructuring credits and in rare instances reserve the right to make equity investments directly.

On September 27, 2016, we and Great Elm Capital Management, Inc. (“GECM”), our external manager, entered into an Investment Management Agreement and an Administration Agreement, and, upon closing the Merger, we began to accrue obligations to our external investment manager under those agreements.

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

Formation Transactions

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

 

On June 23, 2016, Great Elm Capital Group, Inc. (“GEC”) contributed $30,000 in exchange for 1,966,667 shares of our common stock.

 

On September 27, 2016 before we elected to be a BDC, funds (the “MAST Funds”) managed by MAST Capital Management, LLC (“MAST”) contributed to us the Initial GECC Portfolio that we valued at $90,000 in exchange for 5,935,800 shares of our common stock.

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

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

Following the closing of the Merger, we entered into a registration rights agreement with GEC and the MAST Funds.

 

1


 

Full Circle Merger

On June 23, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Full Circle Capital Corporation (“Full Circle”).  On November 3, 2016:

 

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

 

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

 

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

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

Investments

Our level of investment activity varies substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available 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 also may 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.

Expenses

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

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. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. Short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value.

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

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

 

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

 

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

 

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

 

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

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

3


 

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, including assumptions about risk. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset developed based on the best information available in the circumstances.

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

Level 1

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

Level 2

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

Level 3

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

All Level 3 investments that comprise more than 5% of the investments of the fund 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. For debt instruments where we are amortizing OID, when principal payments on the debt instrument are received in an amount in excess of the debt instrument’s amortized cost, the excess principal payments are recorded as interest income.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the first-in first-out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment 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 since our inception in April 2016:

 

Time Period

 

Acquisitions(1)

 

 

Dispositions(2)

 

 

Weighted Average Interest Rate

End of Period(3)

 

Formation Transactions

 

$

90,494

 

 

$

 

 

 

 

Merger

 

 

74,658

 

 

 

 

 

 

 

November 4, 2016 through December 31, 2016

 

 

42,006

 

 

 

(41,738

)

 

 

10.00

%

For the period ended December 31, 2016

 

 

207,158

 

 

 

(41,738

)

 

 

 

Quarter ended March  31, 2017

 

 

75,852

 

 

 

(78,758

)

 

 

9.87

%

Quarter ended June 30, 2017

 

 

21,395

 

 

 

(37,570

)

 

 

9.59

%

For the six months Ended June 30, 2017

 

$

97,247

 

 

$

(116,328

)

 

 

 

Since inception

 

$

304,405

 

 

$

(158,066

)

 

 

 

 

(1)

Includes new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings and PIK income.  Amounts included herein are exclusive of investments in short-term securities, including United States Treasury Bills and money market mutual funds.

(2)

Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities).  Amounts included herein are exclusive of investments in short-term securities, including United States Treasury Bills and money market mutual funds.

(3)

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

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the six months ended June 30, 2017 period from inception through December 31, 2016:

 

 

 

For the six months

ended

June 30, 2017

 

 

For the period from

inception through

December 31, 2016

 

Beginning Investment Portfolio

 

$

154,677

 

 

$

 

Portfolio Investments Acquired via the Formation Transactions and the Merger

 

 

 

 

 

165,152

 

Portfolio Investments Acquired(1)

 

 

97,247

 

 

 

42,006

 

Amortization and Accretion of Premiums and Discounts

 

 

2,694

 

 

 

2,438

 

Portfolio Investments Repaid or Sold

 

 

(116,328

)

 

 

(41,738

)

Net Change in Unrealized Gain (Loss) on Investments

 

 

(10,021

)

 

 

(13,455

)

Net Realized Gains (Losses) on Investments

 

 

3,361

 

 

274

 

Ending Investment Portfolio

 

$

131,630

 

 

$

154,677

 

 

(1)

Includes PIK income.

Amounts in the previous table do not include investments in short-term securities, including United States Treasury Bills and money market mutual funds.

During the three and six months ended June 30, 2017, we recorded net unrealized depreciation of $(7,326) and $(10,021), respectively.

5


 

During the three and six months ended June 30, 2017, we recorded net realized gains of $1,381and $3,361, respectively.  Included in the net realized gains was our disposition of our investment in JN Medical, which resulted in a $1,007 gain.  We also realized gains of $1,134 on the sale of our Everi Payments bonds, $366 on the partial sale and partial prepayment of our loan to Sonifi, and $341 on the sale of our Chester Downs bonds.

Portfolio Classifications

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

 

 

 

June 30, 2017

 

 

 

Investments at

Fair Value

 

 

Percentage of

Total Portfolio

 

Investments:

 

 

 

 

 

 

 

 

Debt Instruments

 

$

131,227

 

 

 

99.7

%

Equity Investments

 

 

403

 

 

 

0.3

%

Total Investments at Fair Value

 

$

131,630

 

 

 

100.0

%

Amounts in the previous table do not include investments in short-term securities, including United States Treasury Bills and money market mutual funds.

 

 

Results of Operations for the Three Months Ended June 30, 2017

 

 

 

In Thousands

 

 

Per Share(1)

 

Total Investment Income(2)

 

$

6,237

 

 

$

0.52

 

Interest Income

 

 

6,138

 

 

 

0.51

 

Dividend Income

 

 

85

 

 

 

0.01

 

Other Income

 

 

14

 

 

 

0.00

 

 

 

 

 

 

 

 

 

 

Net Operating Expenses

 

 

2,759

 

 

 

0.24

 

Management fees

 

 

546

 

 

 

0.05

 

Incentive fees

 

 

871

 

 

 

0.07

 

Total Investment Management Fees

 

 

1,417

 

 

 

0.12

 

Administration fees

 

 

272

 

 

 

0.02

 

Directors’ fees

 

 

21

 

 

 

0.00

 

Interest expense

 

 

631

 

 

 

0.05

 

Professional services

 

 

176

 

 

 

0.01

 

Custody fees

 

 

11

 

 

 

0.00

 

Other

 

 

156

 

 

 

0.01

 

Fees Waivers and Expense Reimbursement

 

 

75

 

 

 

0.01

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

$

3,478

 

 

$

0.29

 

 

(1)

The per share figures are based on a weighted average of 12,000,803 shares for the three months ended June 30, 2017, except where such amounts need to be adjusted to be consistent with the financial highlights of our consolidated financial statements.

(2)

Total investment income includes PIK income of $3,114 for the three months ended June 30, 2017, primarily comprised of Avanti’s semi-annual PIK toggle election.

6


 

Total Investment Income

 

 

 

In Thousands

 

 

Per Share(1)

 

Total Investment Income

 

$

6,237

 

 

$

0.52

 

Interest Income

 

 

6,138

 

 

 

0.51

 

Dividend Income

 

 

85

 

 

 

0.01

 

Other Income

 

 

14

 

 

 

0.00

 

 

(1)

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

 

Interest income includes net accretion of OID and market discount of $1,516 and total investment income included PIK income of $3,114.

We also generated $14 of fee income, which is included in Other Income and is typically not recurring in nature.  

Expenses

 

 

 

In Thousands

 

 

Per Share (1)

 

Net Operating Expenses

 

$

2,759

 

 

$

0.24

 

Management fees

 

 

546

 

 

 

0.05

 

Incentive fees

 

 

871

 

 

 

0.07

 

Total Investment Management Fees

 

 

1,417

 

 

 

0.12

 

Administration fees

 

 

272

 

 

 

0.02

 

Directors’ fees

 

 

21

 

 

 

0.00

 

Interest expense

 

 

631

 

 

 

0.05

 

Professional services

 

 

176

 

 

 

0.01

 

Custody fees

 

 

11

 

 

 

0.00

 

Other

 

 

156

 

 

 

0.01

 

Fees Waivers and Expense Reimbursement

 

 

75

 

 

 

0.01

 

 

(1)

The per share figures noted above are based on a weighted average of 12,000,803 shares for the three months ended June 30, 2017.

 

Total expenses for the three months ended June 30, 2017 were $2,684, prior to giving effect to the impact of our administration fee waiver accrual.

Total investment management fees were $1,417, with $546 of management fees and $871 of incentive fees accrued during the period.  The incentive fees are currently expected to be deferred in accordance with our investment management agreement.

Total administration fees were $272, which include direct costs deemed reimbursable under our administration agreement and fees paid for sub-administration services.  In the quarter ended June 30, 2017, we reversed $75 of the previously accrued administration fee waiver based on our updated expenses accrued from November 4, 2016 through June 30, 2017. This reversal had the effect of increasing our total expenses for the quarter. The final cap on costs will be determined after completion of the year ending November 4, 2017.

Interest expense for the period was $631.

Net Investment Income

Net investment income for the three months ended June 30, 2017 was $3,478.

7


 

Realized Gain (Loss) on Investments

During the three months ended June 30, 2017, we recorded net realized gains of $1,381, primarily in connection with our disposition of our investments in Everi Payments and Chester Downs, which resulted in gains of $779 and $341, respectively.  We also realized gains of $203 on the prepayment of a portion of our loan to Sonifi Solutions

Change in Unrealized Gain (Loss) on Investments

Net change in unrealized appreciation (depreciation) on investments was $(7,326) for the three months ended June 30, 2017. The following table summarizes the significant changes in unrealized appreciation (depreciation) of our investment portfolio, for the three months ended June 30, 2017 by portfolio company.

 

 

 

 

 

 

 

March 31,2017

 

 

June 30, 2017

 

Portfolio Company

 

Change in Unrealized

Appreciation

(Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized

Appreciation

(Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized

Appreciation

(Depreciation)

 

Avanti Communications

   Group plc (1)

 

$

(4,122

)

 

$

64,417

 

 

$

47,947

 

 

$

(16,470

)

 

$

67,818

 

 

$

47,226

 

 

$

(20,592

)

PE Facility Solutions, LLC

 

 

(1,648

)

 

 

19,042

 

 

 

18,681

 

 

 

(361

)

 

 

19,502

 

 

 

17,493

 

 

 

(2,009

)

OPS Acquisitions Limited and

   Ocean Protection

   Services Limited

 

 

(460

)

 

 

4,234

 

 

 

2,674

 

 

 

(1,560

)

 

 

4,240

 

 

 

2,220

 

 

 

(2,020

)

Other(2)

 

 

(1,096

)

 

 

80,691

 

 

 

82,932

 

 

 

2,241

 

 

 

137,487

 

 

 

138,632

 

 

 

1,145

 

Totals

 

$

(7,326

)

 

$

168,384

 

 

$

152,234

 

 

$

(16,150

)

 

$

229,047

 

 

$

205,571

 

 

$

(23,476

)

 

(1)

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

(2)

Other represents all remaining investments.

 

 

Results of Operations for the six months ended June 30, 2017

 

 

 

In Thousands

 

 

Per Share(1)

 

Total Investment Income(2)

 

$

13,552

 

 

$

1.10

 

Interest Income

 

 

12,964

 

 

 

1.05

 

Dividend Income

 

 

131

 

 

 

0.01

 

Other Income

 

 

457

 

 

 

0.04

 

 

 

 

 

 

 

 

 

 

Net Operating Expenses

 

 

5,980

 

 

 

0.49

 

Management fees

 

 

1,139

 

 

 

0.09

 

Incentive fees

 

 

1,894

 

 

 

0.15

 

Total Investment Management Fees

 

 

3,033

 

 

 

0.25

 

Administration fees

 

 

767

 

 

 

0.06

 

Directors’ fees

 

 

48

 

 

 

0.00

 

Interest expense

 

 

1,262

 

 

 

0.10

 

Professional services

 

 

507

 

 

 

0.04

 

Custody fees

 

 

24

 

 

 

0.00

 

Other

 

 

269

 

 

 

0.02

 

Fees Waivers and Expense Reimbursement

 

 

70

 

 

 

0.01

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

$

7,572

 

 

$

0.61

 

 

(1)

The per share figures are based on a weighted average of 12,316,884 shares for the six months ended June 30, 2017 except where such amounts need to be adjusted to be consistent with the financial highlights of our consolidated financial statements.

(2)

Total investment income includes PIK income of $4,256 for the six months ended June 30, 2017.

8


 

Total Investment Income

 

 

 

In Thousands

 

 

Per Share(1)

 

Total Investment Income

 

$

13,552

 

 

$

1.10

 

Interest Income

 

 

12,964

 

 

 

1.05

 

Dividend Income

 

 

131

 

 

 

0.01

 

Other Income

 

 

457

 

 

 

0.04

 

 

(1)

The per share figures noted above are based on a weighted average of 12,316,884 shares for the six months ended June 30, 2017.

 

Interest income includes net accretion of OID and market discount of $2,694 and total investment income included PIK income of $4,256.  

We also generated $457 of fee income, which is included in Other Income and is typically not recurring in nature.  

Expenses

 

 

 

In Thousands

 

 

Per Share (1)

 

Net Operating Expenses

 

$

5,980

 

 

$

0.49

 

Management fees

 

 

1,139

 

 

 

0.09

 

Incentive fees

 

 

1,894

 

 

 

0.15

 

Total Investment Management Fees

 

 

3,033

 

 

 

0.25

 

Administration fees

 

 

767

 

 

 

0.06

 

Directors’ fees

 

 

48

 

 

 

0.00

 

Interest expense

 

 

1,262

 

 

 

0.10

 

Professional services

 

 

507

 

 

 

0.04

 

Custody fees

 

 

24

 

 

 

0.00

 

Other

 

 

269

 

 

 

0.02

 

Fees Waivers and Expense Reimbursement

 

 

70

 

 

 

0.01

 

 

(1)

The per share figures are based on a weighted average of 12,316,884 shares for the six months ended June 30, 2017

 

Total expenses for six months ended June 30, 2017 were $5,910, prior to giving effect to the impact of our administration fee waiver accrual.

Total investment management fees were $3,033, with $1,139 of management fees and $1,894 of incentive fees accrued during the period.  The incentive fees are currently expected to be deferred in accordance with our investment management agreement.

Total administration fees were $767, which includes direct costs reimbursable under our administration agreement and fees paid for sub-administration services.  We have accrued $0 as of June 30, 2017 under the reimbursement cap of the administration agreement, based on expenses accrued from November 4, 2016 through June 30, 2017. The cap on costs will be determined after completion of the year ending November 4, 2017.

Interest expense for the period was $1,262 for the six months ended June 30, 2017.

Net Investment Income

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

9


 

Realized Gain (Loss) on Investments

During the six months ended June 30, 2017, we recorded net realized gains of $3,361, primarily in connection with our disposition of our investment in JN Medical, which resulted in a $1,007 gain, and our sale of our position in Everi Payments, which resulted in realized gains of $1,134.  We also realized gains of $341 on the sale of our Chester Downs bonds, $366 on prepayments of our loan to Sonifi Solutions, and $281 on the sale of our Trilogy International bonds.

Change in Unrealized Gain (Loss) on Investments

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

 

 

 

 

 

 

 

December 31, 2016

 

 

June 30, 2017

 

Portfolio Company

 

Change in Unrealized

Appreciation

(Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized

Appreciation

(Depreciation)

 

 

Cost

 

 

Fair Value

 

 

Unrealized

Appreciation

(Depreciation)

 

Avanti Communications

   Group plc

 

$

(7,315

)

 

$

55,298

 

 

$

42,021

 

 

$

(13,277

)

 

$

67,818

 

 

$

47,226

 

 

$

(20,592

)

OPS Acquisitions Limited and

   Ocean Protection

   Services Limited

 

 

(2,051

)

 

 

4,255

 

 

 

4,286

 

 

 

31

 

 

 

4,240

 

 

 

2,220

 

 

 

(2,020

)

PE Facility Solutions, LLC

 

 

(2,009

)

 

 

 

 

 

 

 

 

 

 

 

19,502

 

 

 

17,493

 

 

 

(2,009

)

Sonifi Solutions, Inc.

 

 

1,152

 

 

 

5,933

 

 

 

6,715

 

 

 

782

 

 

 

5,302

 

 

 

7,236

 

 

 

1,934

 

Other(1)

 

 

202

 

 

 

102,646

 

 

 

101,655

 

 

 

(991

)

 

 

132,185

 

 

 

131,396

 

 

 

(789

)

Totals

 

$

(10,021

)

 

$

168,132

 

 

$

154,677

 

 

$

(13,455

)

 

$

229,047

 

 

$

205,571

 

 

$

(23,476

)

 

(1)

Other represents all remaining investments.

Liquidity and Capital Resources

At June 30, 2017, we had approximately $4,869 of cash and cash equivalents, none of which was restricted in nature.  At June 30, 2017, we also had $53,990 invested in a money market fund that is classified as an investment rather than cash and cash equivalents.

At June 30, 2017, we had investments in debt securities of 17 companies, totaling approximately $131,227 at fair value and equity investments in seven companies, totaling approximately $403 at fair value. $4,256 of cumulative accrued PIK income is included in carrying value of our investments.

For the six months ended June 30, 2017, cash provided by operating activities, consisting primarily of net purchases of investments and the items described in “Results of Operations,” was approximately $40,556, reflecting the purchases and repayments of investments, net investment income resulting from operations, offset by non-cash income related to OID and PIK income, changes in working capital and accrued interest receivable. Net cash provided by purchases and sales of investments was approximately $19,081, reflecting principal repayments and sales of $116,328, offset by additional investments of $97,247. Such amounts included draws and repayments on revolving credit facilities.  Our Board previously set our distribution rate at $0.083 per share per month and we intend to re-evaluate our dividend rate from time to time.

Stock Buyback Program

We have implemented a stock buyback program through May 2018 pursuant to Rule 10b5‑1 of the Exchange Act to repurchase our shares in an aggregate amount of up to $15,000 at market prices at any time our shares trade below 90% of NAV, subject to our compliance with our liquidity, covenant, leverage and regulatory requirements.  Our Board has increased the overall size of the stock buyback program by a further $35,000.

10


 

Off-Balance Sheet Arrangements

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

Notes Payable.

On November 3, 2016, we assumed approximately $33,646 in aggregate principal amount of Full Circle’s 8.25% Notes due June 30, 2020 (the “Notes”).  The Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears at a rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at our option. The Notes are listed on the NASDAQ Global Market under the trading symbol “FULLL” with a par value of $25.00 per share.

We have filed a registration statement with respect to our offer and sale of new senior unsecured notes to refinance the Notes.

Recent Developments

In July 2017, we purchased $5.0 million par value of Tru Taj, LLC bonds at a price of approximately 97% of par value. Such debt security bears interest at a rate of 12.00% and matures August 15, 2021.

In July and August, we purchased an additional $5.0 million par value of the loan to Commercial Barge Line Company at an average price of approximately 88% of par value.  Such debt security bears interest at a rate of LIBOR plus 8.75%, which was 9.79% as of June 30, 2017, and matures on November 12, 2020.  Including these additional acquisitions, we now have a position size of approximately $6.9 million par value of the loan.

Our Board declared the monthly distributions for the fourth quarter of 2017 at an annual rate of approximately 7.50% of NAV, which equates to $0.083 per month. The schedule of distribution payments is as follows:

 

Month

 

Rate

 

 

Record Date

 

Payable Date

October

 

$

0.083

 

 

October 31, 2017

 

November 15, 2017

November

 

$

0.083

 

 

November 30, 2017

 

December 15, 2017

December

 

$

0.083

 

 

December 29, 2017

 

January 16, 2018

 

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, 2017, 7 debt investments in our portfolio bore interest at a fixed rate, and the remaining 13 debt investments were at variable rates, representing approximately $67,444 and $63,783 in debt at fair value, respectively. The variable rates are based upon LIBOR.

To illustrate the potential impact of a change in the underlying interest rate on our net investment income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%, and 3% decrease in the underlying LIBOR rate, and no other change in our portfolio as of June 30, 2017. We have also assumed there are no outstanding floating rate borrowings by the Company. See the below table for the effect the rate changes would have on net investment income.

 

LIBOR Increase (Decrease)

 

 

Increase (decrease) of Net

Investment Income

 

 

3.00

%

 

$

1,999

 

 

2.00

%

 

$

1,343

 

 

1.00

%

 

$

687

 

 

-1.00

%

 

$

(264

)

 

-2.00

%

 

$

(308

)

 

-3.00

%

 

$

(308

)

 

11


 

This analysis does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments that could affect the net increase in net assets resulting from operations. Accordingly, no 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 June 30, 2017, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable 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 Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2017 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.  See Note 6 to our unaudited consolidated financial statements.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K (File No. 814-01211).

12


 

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

None.

Issuer Purchases of Equity Securities

In the prospectus for the Merger, we announced that we would initiate a stock buyback program in an aggregate amount of $15,000. This program expires in May 2018.  For the six months ended June 30, 2017, we purchased 1,222,325 shares under our stock buyback program and our tender offer, at a weighted average price of $11.41 per share. As of August 11, 2017 we have cumulatively purchased 513,138 shares under our stock buyback program at a weighted average price of $11.12 per share, resulting in $5,708 of cumulative cash paid, under the program since November 4, 2016.

 

Month

 

Total Number of

Shares Purchased

 

 

Average Price Per

Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Program

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares that May

Yet Be Purchased

Under the Plans or

Programs

(Amounts in dollars)

 

November 2016

 

 

16,030

 

 

$

10.79

 

 

 

16,030

 

 

$

14,826,985

 

December 2016

 

 

82,142

 

 

$

10.72

 

 

 

82,142

 

 

$

13,946,200

 

Total 2016

 

 

98,172

 

 

$

10.73

 

 

 

98,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2017

 

 

132,434

 

 

$

11.48

 

 

 

132,434

 

 

$

12,425,611

 

February 2017

 

 

72,678

 

 

$

11.26

 

 

 

72,678

 

 

$

11,607,509

 

March 2017

 

 

40,617

 

 

$

11.09

 

 

 

40,617

 

 

$

11,157,069

 

April 2017

 

 

16,846

 

 

$

11.38

 

 

 

16,846

 

 

$

10,965,351

 

May 2017 (1)

 

 

944,535

 

 

$

11.44

 

 

 

944,535

 

 

$

10,158,672

 

June 2017

 

 

15,215

 

 

$

10.42

 

 

 

15,215

 

 

$

10,000,132

 

Total 2017

 

 

1,222,325

 

 

$

11.41

 

 

 

1,222,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,320,497

 

 

$

11.36

 

 

 

1,320,497

 

 

$

10,000,132

 

 

(1)

Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in accordance with the $10,000 tender offer announced on March 30, 2017 that expired on May 5, 2017.

 

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

Not applicable

Item 6. Exhibits.

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

13


 

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 as of August 14, 2017.

 

 

 

GREAT ELM CAPITAL CORP.

 

 

 

 

 

 

By:

/s/ Peter A. Reed

 

 

Name:

Peter A. Reed

 

 

Title:

Chief Executive Officer

 

 

 

 

 

 

By:

/s/ Michael J. Sell

 

 

Name:

Michael J. Sell

 

 

Title:

Chief Financial Officer

 

 

 

14


 

GREAT ELM CAPITAL CORP.

INDEX TO FINANCIAL STATEMENTS

JUNE 30, 2017

 

Consolidated Statement of Assets and Liabilities as of June 30, 2017 (unaudited) and December 31, 2016

 

F-2

Consolidated Statement of Operations for the three and six months ended June 30, 2017(unaudited)

 

F-3

Consolidated Statement of Changes in Net Assets for the six months ended June 30, 2017 (unaudited)

 

F-4

Consolidated Statement of Cash Flows for the six months ended June 30, 2017 (unaudited)

 

F-5

Consolidated Schedule of Investments as of June 30, 2017 (unaudited) and December 31, 2016

 

F-6

Notes to Consolidated Financial Statements (unaudited)

 

F-16

 

 

 

F-1


 

GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

JUNE 30, 2017

Dollar amounts in thousands (except per share amounts)

 

 

 

June 30, 2017

 

 

December 31,  2016

 

Assets

 

(unaudited)

 

 

 

 

 

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

   (amortized cost of $131,294 and $163,809, respectively)

 

$

111,852

 

 

$

150,323

 

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

   (amortized cost of $73,943 and $0, respectively)

 

 

73,941

 

 

 

 

Affiliated investments, at fair value

   (amortized cost of $4,240 and $4,255, respectively)

 

 

2,220

 

 

 

4,286

 

Control investments, at fair value

   (amortized cost of $19,571 and $68, respectively)

 

 

17,558

 

 

 

68

 

Total investments

 

 

205,571

 

 

 

154,677

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

4,869

 

 

 

66,782

 

Receivable for investments sold

 

 

 

 

 

9,406

 

Interest receivable

 

 

2,952

 

 

 

4,338

 

Dividends receivable

 

 

36

 

 

 

 

Principal receivable

 

 

 

 

 

786

 

Due from portfolio company

 

 

82

 

 

 

312

 

Deposit at broker

 

 

103

 

 

 

56

 

Due from affiliates

 

 

 

 

 

80

 

Prepaid expenses and other assets

 

 

134

 

 

 

107

 

Total assets

 

$

213,747

 

 

$

236,544

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Notes payable 8.25% due June 30, 2020 (including unamortized premium

   of $763 and $888 at June 30, 2017 and December 31, 2016, respectively)

 

$

34,408

 

 

$

34,534

 

Payable for investments purchased

 

 

19,953

 

 

 

21,817

 

Distributions payable

 

 

960

 

 

 

2,123

 

Due to affiliates

 

 

3,881

 

 

 

3,423

 

Accrued expenses and other liabilities

 

 

843

 

 

 

1,663

 

Total liabilities

 

$

60,045

 

 

$

63,560

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 6)

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Net Assets

 

 

 

 

 

 

 

 

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

   11,568,555 and 12,790,880 shares issued and outstanding at

   June 30, 2017 and December 31, 2016, respectively)

 

$

116

 

 

$

128

 

Additional paid-in capital

 

 

205,233

 

 

 

219,317

 

Accumulated net realized losses

 

 

(30,980

)

 

 

(34,341

)

Undistributed net investment income

 

 

2,809

 

 

 

1,335

 

Net unrealized depreciation on investments

 

 

(23,476

)

 

 

(13,455

)

Total net assets

 

$

153,702

 

 

$

172,984

 

Total liabilities and net assets

 

$

213,747

 

 

$

236,544

 

Net asset value per share

 

$

13.29

 

 

$

13.52

 

 

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

F-2


GREAT ELM CAPITAL CORP.

CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)

Dollar amounts in thousands (except per share amounts)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Investment Income:

 

 

 

 

 

 

 

 

Interest income from:

 

 

 

 

 

 

 

 

Non-affiliated, non-controlled investments

 

$

5,561

 

 

$

12,042

 

Affiliated investments

 

 

(90

)

 

 

48

 

Controlled investments

 

 

667

 

 

 

874

 

Total interest income

 

 

6,138

 

 

 

12,964

 

Dividend income from non-affiliated, non-controlled investments

 

 

85

 

 

 

131

 

Other income

 

 

14

 

 

 

457

 

Total investment income

 

 

6,237

 

 

 

13,552

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Management fees

 

 

546

 

 

 

1,139

 

Incentive fees

 

 

871

 

 

 

1,894

 

Administration fees

 

 

272

 

 

 

767

 

Custody fees

 

 

11

 

 

 

24

 

Directors’ fees

 

 

21

 

 

 

48

 

Professional services

 

 

176

 

 

 

507

 

Interest expense

 

 

631

 

 

 

1,262

 

Other expenses

 

 

156

 

 

 

269

 

Total expenses

 

 

2,684

 

 

 

5,910

 

Accrued administration fee waiver

 

 

75

 

 

 

70

 

Net expenses

 

 

2,759

 

 

 

5,980

 

Net investment income

 

 

3,478

 

 

 

7,572

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Net realized gain/(loss) from:

 

 

 

 

 

 

 

 

Non-affiliated, non-controlled investments

 

 

1,381

 

 

 

3,361

 

Affiliated investments

 

 

 

 

 

 

Controlled investments

 

 

 

 

 

 

Total net realized gain/(loss)