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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 March 31, 2023
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
6.75% Notes due 2025
GECCM
6.50% Notes due 2024
GECCN
5.875% Notes due 2026
GECCO
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 April 28, 2023, the registrant had 7,601,958 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
3
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
13
Item 4.
Controls and Procedures
14
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Item 6.
Exhibits
15
Signatures
16
Index to Consolidated Financial Statements
F-17
Consolidated Statements of Assets and Liabilities (unaudited)
F-18
Consolidated Statements of Operations (unaudited)
F-19
Consolidated Statements of Changes in Net Assets (unaudited)
F-20
Consolidated Statements of Cash Flows (unaudited)
F-21
Consolidated Schedule of Investments (unaudited)
F-23
Notes to the Unaudited Consolidated Financial Statements
F-45
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:
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,” herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (the “SEC”).
Item 1. 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 income-generating equity investments, including investments in specialty finance businesses. To achieve our investment objective, we invest in secured and senior secured debt instruments of middle market companies, as well as income-generating equity investments in specialty finance companies, that we believe offer sufficient downside protection and have the potential to generate attractive returns. We generally define middle market companies as companies with enterprise values between $100 million and $2 billion. We also make investments throughout other portions of a company’s capital structure, including subordinated debt, mezzanine debt, and equity or equity‑linked securities. We source these transactions directly with issuers and in the secondary markets through relationships with industry professionals.
In December 2021, Great Elm Specialty Finance, LLC (“GESF") a wholly-owned subsidiary of GECC, was formed to oversee specialty finance related investments, and Michael Keller, a seasoned professional with significant experience in specialty finance, was appointed President of GESF. We believe investments in specialty finance companies along the “continuum of lending” provide durable risk adjusted returns that are expected to be largely uncorrelated to the liquid credit markets. The “continuum of lending” as seen by Great Elm Capital Management, Inc. (“GECM”) is the various stages of capital that are provided to under-banked small and medium sized businesses and includes, but is not limited to inventory and purchase order financing, receivables factoring, asset-based and asset-backed lending, and equipment financing. GECM believes that ownership interests in multiple specialty finance companies will create a natural competitive advantage for each business and generate both revenue and cost synergies across companies.
On September 27, 2016, we and 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 our external investment manager under those agreements. On August 1, 2022, upon receiving our stockholders' approval, we and GECM entered into an amendment to the Investment Management Agreement to reset the capital gains incentive fee to begin on April 1, 2022, which eliminated $163.2 million of realized and unrealized losses incurred prior to April 1, 2022 in calculating future incentive fees. In addition, the incentive fee based on income was amended to reset the mandatory deferral commencement date used in calculating deferred incentive fees to April 1, 2022. The Investment Management Agreement renews for successive annual periods, subject to requisite approvals from our board of directors (our "Board") and/or stockholders.
We have elected to be treated as a RIC for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify 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.
Critical Accounting Policies
Valuation of Portfolio Investments
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. 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.
4
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 expected 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.
Portfolio and Investment Activity
The following is a summary of our investment activity for the year ended December 31, 2022 and the three months ended March 31, 2023:
(in thousands)
Acquisitions(1)
Dispositions(2)
Weighted Average YieldEnd of Period(3)
Quarter ended March 31, 2022
$
27,578
(29,723
)
10.38
%
Quarter ended June 30, 2022
44,750
(34,014
10.27
Quarter ended September 30, 2022
40,212
(28,430
11.59
Quarter ended December 31, 2022
37,588
(20,461
12.43
For the Year Ended December 31, 2022
150,128
(112,628
Quarter ended March 31, 2023
53,293
(57,175
13.06
For the Three Months Ended March 31, 2023
5
Portfolio Reconciliation
The following is a reconciliation of the investment portfolio for the three months ended March 31, 2023 and the year ended December 31, 2022. Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, are excluded from the table below.
Beginning Investment Portfolio, at fair value
224,957
212,149
Portfolio Investments acquired(1)
Amortization of premium and accretion of discount, net
541
1,328
Portfolio Investments repaid or sold(2)
Net change in unrealized appreciation (depreciation) on investments
3,473
100,016
Net realized gain (loss) on investments
1,850
(126,036
Ending Investment Portfolio, at fair value
226,939
Portfolio Classification
The following table shows the fair value of our portfolio of investments by industry as of March 31, 2023 and December 31, 2022 (in thousands):
March 31, 2023
December 31, 2022
Industry
Investments atFair Value
Percentage ofFair Value
Specialty Finance
56,589
24.94
58,250
25.89
Chemicals
26,204
11.55
31,702
14.09
Insurance
14,591
6.43
2,340
1.04
Oil & Gas Exploration & Production
13,139
5.79
15,136
6.74
Energy Midstream
12,248
5.40
22,559
10.03
Internet Media
12,216
5.38
12,247
5.44
Shipping
12,042
5.31
7,206
3.20
Transportation Equipment Manufacturing
11,064
4.87
11,803
5.25
Consumer Products
11,042
4.86
8,413
3.74
Energy Services
9,764
4.30
2,877
1.28
Casinos & Gaming
8,601
3.79
9,301
4.13
Closed-End Fund
6,232
2.75
5,825
2.59
Metals & Mining
6,027
2.66
6,046
2.69
Industrial
5,476
2.41
5,498
2.44
Food & Staples
5,330
2.35
3,660
1.63
Aircraft
3,939
1.73
3,577
1.59
Oil & Gas Refining
3,920
5,388
2.40
Restaurants
3,447
1.52
3,110
1.38
Hospitality
3,128
4,988
2.22
Apparel
2,168
0.95
2,371
1.05
Retail
44
0.02
-
Special Purpose Acquisition Company
35
19
0.01
IT Services
Auto Manufacturer
Communications Equipment
1
Biotechnology
Technology
(313
(0.14
)%
(365
(0.16
Household & Personal Products
Wireless Telecommunications Services
2,997
1.33
Total
100.00
6
Results of Operations
Investment Income
For the Three Months Ended March 31,
2023
2022
In Thousands
Per Share(1)
Per Share(2)
Total Investment Income
8,410
1.11
5,558
1.22
Interest income
6,630
0.87
4,041
0.89
Dividend income
934
0.13
1,267
0.28
Other income
846
0.11
250
0.05
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.
Interest income increased $2.6 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 primarily due to growth of the portfolio and rising interest rates. As of March 31, 2023, the debt investment portfolio had an average coupon rate of 11.8% on approximately $204.2 million in principal as compared to 10.3% on $146.4 million of principal as of March 31, 2022, excluding positions on non-accrual in each period.
Dividend income for the three months ended March 31, 2023 decreased as compared to the corresponding period in the prior year primarily due to a lower current quarter distribution from our investments in specialty finance portfolio companies and exits from certain preferred equity positions.
7
Total Expenses
5,543
0.73
(497
(0.11
Management fees
869
780
0.17
Incentive fees
710
0.09
Incentive fee waiver
(4,854
(1.06
Total advisory and management fees
1,579
0.20
(4,074
(0.89
Administration fees
295
0.04
221
Directors’ fees
52
63
Interest expense
2,821
0.38
2,670
0.59
Professional services
536
0.07
418
Custody fees
22
0.00
Other
238
0.03
191
Income Tax Expense
Excise tax
28
101
Expenses are largely comprised of advisory fees and administration fees paid to GECM and interest expense on our outstanding notes payable. See “—Liquidity and Capital Resources.” Advisory fees include management fees and incentive fees calculated in accordance with the Investment Management Agreement, and administration fees include direct costs reimbursable to GECM under the Administration Agreement and fees paid for sub-administration services.
Incentive fees for the three months ended March 31, 2023 were $0.7 million and no incentive fees were recognized in the corresponding period in the prior year due to the incentive fee waiver. GECM waived all accrued and unpaid incentive fees pursuant to the Investment Management Agreement as of March 31, 2022. As of March 31, 2022, there were approximately $4.9 million of accrued and unpaid incentive fees held on our balance sheet. In connection with the incentive fee waiver, we recognized the reversal of these accrued and unpaid incentive fees during the period ending March 31, 2022, resulting in a corresponding increase in net income and increase in net asset value ("NAV") in such period (subject to any offsetting additional expenses or losses). The incentive fee waiver is not subject to recapture.
Management fees increased for the three months ended March 31, 2023 as compared to the corresponding period in the prior year due to increases in the underlying management fee assets which primarily consists of the fair value of the portfolio of investments. Administration fees increased in the three months ended March 31, 2023 as compared to the corresponding period in the prior year primarily due to increases in allocable personnel time spent on GECC matters.
Professional services costs for the three months ended March 31, 2023 increased as compared to the three months ended March 31, 2022, primarily due to increased legal expenses associated with specific transaction matters, as well as general rate increases for professional services including legal and accounting costs.
For the three months ended March 31, 2023, interest expense increased as compared to the corresponding period in the prior year due to the revolver which had an average outstanding balance of $8.4 million during the quarter ended March 31, 2023 but no outstanding balance during the quarter ended March 31, 2022.
8
Realized Gains (Losses)
Net Realized Gain (Loss)
1,845
0.24
(19,933
(4.37
Gross realized gain
1,902
0.25
791
Gross realized loss
(57
(0.01
(20,724
(4.54
During the three months ended March 31, 2023, net realized gains were primarily driven by sales of our investments in Crestwood Equity Partners, LP preferred equity, ANGUS Chemical Company first lien secured loan, and Forum Energy Technologies, Inc. first lien secured convertible bond resulting in realized gains of $0.7 million, $0.2 million, and $0.1 million, respectively. In addition, the paydowns of our investments in Par Petroleum, LLC first lien secured loans and W&T Offshore, Inc. second lien secured bond resulted in realized gains of $0.4 million and $0.2 million, respectively.
During the three months ended March 31, 2022, net realized losses were primarily driven by the sales of our investment in Tru (UK) Asia Limited (“Tru Taj”) common stock and California Pizza Kitchen, Inc. (“CPK”) common stock for which we recognized realized losses of $15.9 million and $4.2 million, respectively. These realized losses were offset by the corresponding reversals of previously recognized unrealized losses on these positions.
Change in Unrealized Appreciation (Depreciation) on Investments
Net change in unrealized appreciation/ (depreciation)
3,476
0.46
8,870
1.94
Unrealized appreciation
7,465
0.98
20,762
4.55
Unrealized depreciation
(3,989
(0.52
(11,892
(2.61
Net unrealized appreciation for the three months ended March 31, 2023 is primarily due to the increases in fair value of our investments in United Insurance Holding Corp. unsecured bonds and Prestige Capital Finance, LLC common equity of $3.0 million and $0.8 million, respectively. This unrealized appreciation was partially offset by unrealized depreciation due to decreases in fair value of our investment in Maverick Gaming, LLC first lien secured loan and First Brands, Inc. second lien secured loan of $0.9 million and $0.8 million, respectively.
During the three months ended March 31, 2022, gross unrealized appreciation primarily consisted of the reversal of previously recognized unrealized losses on our investments in Tru Taj common stock and CPK common stock, which were offset by corresponding realized losses as discussed above. Gross unrealized depreciation was driven by the write downs on our investments in the Avanti Communications Group plc ("Avanti") 1.125 lien secured loan, Avanti 1.25 lien secured loan and 1.5 lien secured loan, on which we collectively recognized $7.7 million in unrealized depreciation. In April 2022, Avanti announced a series of restructuring transactions pursuant to which certain creditors of Avanti (excluding GECC) contributed additional senior debt financing to Avanti, and the 2nd lien secured bond and 1.5 lien secured loan were converted to equity.
9
Liquidity and Capital Resources
We generate liquidity through our operations with cash received from investment income and sales and paydowns on investments. Such proceeds are generally reinvested in new investment opportunities, distributed to shareholders in the form of dividends, or used to pay operating expenses. We also receive proceeds from our issuances of notes payable and our revolving credit facility and from time to time may raise additional equity capital. See “—Revolver” and “—Notes Payable” below for more information regarding our outstanding credit facility and notes.
At March 31, 2023, we had approximately $1.6 million of cash and cash equivalents and approximately $10.8 million of money market fund investments at fair value. At March 31, 2023, we had investments in 51 debt instruments across 42 companies, totaling approximately $184.1 million at fair value and 65 equity investments in 64 companies, totaling approximately $42.9 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 March 31, 2023, we had approximately $21.0 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 March 31, 2023 balance sheet to satisfy the unfunded commitments.
For the three months ended March 31, 2023, net cash provided by operating activities was approximately $8.7 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 $6.8 million, reflecting payments for additional investments of $50.4 million, offset by proceeds from principal repayments and sales of $57.2 million. Such amounts include draws and repayments on investments in revolving credit facilities.
For the three months ended March 31, 2023, net cash used in financing activities was $7.7 million, consisting of $5.0 million in net repayments on the revolving credit facility and $2.7 million in distributions to stockholders.
We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months and for the foreseeable future thereafter.
Contractual Obligations and Cash Requirements
A summary of our material contractual payment obligations and cash obligations as of March 31, 2023 is as follows:
Less than1 year
1-3 years
3-5 years
More than5 years
Contractual and Other Cash Obligations
GECCM Notes
45,610
GECCN Notes
42,823
GECCO Notes
57,500
Revolving Credit Facility
5,000
150,933
93,433
See “—Revolver” and “—Notes Payable” below for more information regarding our outstanding credit facility and notes.
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. On August 1, 2022, our stockholders approved an amendment to the Investment Management Agreement to eliminate $163.2 million of realized and unrealized losses incurred prior to April 1, 2022 from the calculation of future capital gains incentive fees and reset the capital gain incentive fee and mandatory deferral periods in Sections 4.4 and 4.5, respectively, of the Investment Management Agreement to begin on April 1, 2022.
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.
10
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.
Revolver
On May 5, 2021, we entered into a Loan, Guarantee and Security Agreement (the “Loan Agreement”) with City National Bank (“CNB”). The Loan Agreement provides for a senior secured revolving line of credit of up to $25 million (subject to a borrowing base as defined in the Loan Agreement). We may request to increase the revolving line in an aggregate amount not to exceed $25 million, which increase is subject to the sole discretion of CNB. The maturity date of the revolving line is May 5, 2024. Borrowings under the revolving line bear interest at a rate equal to (i) the secured overnight financing rate ("SOFR") plus 3.50%, (ii) a base rate plus 2.00% or (iii) a combination thereof, as determined by us. As of March 31, 2023, there were $5.0 million borrowings outstanding under the revolving line.
Borrowings under the revolving line are secured by a first priority security interest in substantially all of our assets, subject to certain specified exceptions. We have made customary representations and warranties and are required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar loan agreements. In addition, the Loan Agreement contains financial covenants requiring (i) net assets of not less than $65 million, (ii) asset coverage equal to or greater than 150% and (iii) bank asset coverage equal to or greater than 300%, in each case tested as of the last day of each fiscal quarter of the Company. Borrowings are also subject to the leverage restrictions contained in the Investment Company Act of 1940, as amended (the "Investment Company Act"). In May 2022, the Loan Agreement was amended to require an asset coverage equal to or greater than 150% as of the last day of each fiscal quarter except for the fiscal quarters ending March 31, 2022 and June 30, 2022. In addition, the interest rate was amended to replace London Interbank Offered Rate ("LIBOR") with SOFR.
Notes Payable
On January 11, 2018, we issued $43.0 million in aggregate principal amount of 6.75% notes due 2025 (the “GECCM Notes”). On January 19, 2018 and February 9, 2018, we issued 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 March 31, 2023 is $45.6 million.
On June 18, 2019, we issued $42.5 million in aggregate principal amount of 6.50% Notes due 2024 (the “GECCN Notes”), which included $2.5 million of GECCN Notes issued in connection with the partial exercise of the underwriters’ over-allotment option. On July 5, 2019, we issued 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 March 31, 2023 is $42.8 million.
On June 23, 2021, we issued $50.0 million in aggregate principal amount of 5.875% notes due 2026 (the “GECCO Notes” and, together with the GECCM Notes and GECCN Notes, the “Notes”). On July 9, 2021, we issued an additional $7.5 million of the GECCO Notes upon full exercise of the underwriters’ over-allotment option. The aggregate principal balance of the GECCO Notes outstanding as of March 31, 2023 is $57.5 million.
The Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The unsecured notes are effectively subordinated, or junior in right of payment, to indebtedness under our Loan Agreement and any other 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 Notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes, GECCN Notes and GECCO Notes will mature on January 31, 2025, June 30, 2024 and June 30, 2026, respectively. The GECCM Notes and GECCN Notes are currently callable at the Company’s option and the GECCO Notes can be called on, or after, June 30, 2023. Holders of the Notes do not have the option to have the Notes repaid prior to the stated maturity date. The 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.
As of March 31, 2023, our asset coverage ratio was approximately 159.8%. Under the Investment Company Act, we are subject to a minimum asset coverage ratio of 150%.
11
Share Price Data
The following table sets forth: (i) NAV per share of our common stock as of the applicable period end, (ii) the range of high and low closing sales prices of our common stock as reported on the Nasdaq Global Market during the applicable period, (iii) the closing high and low sales prices as a premium (discount) to NAV during the relevant period, and (iv) the distributions per share of our common stock declared during the applicable period. Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount or premium to NAV is separate and distinct from the risk that our NAV will decrease. During the last two fiscal years, our common stock has generally traded below NAV. During the last two fiscal years, using the high and low sales prices within each fiscal quarter compared to the NAV at such quarter end, our common stock has traded as high as a 27.0% premium to NAV and as low as a 36.0% discount to NAV.
Closing Sales Price
Premium (Discount) of High Sales Price
Premium (Discount) of Low Sales Price
Distributions
NAV(1)
High
Low
to NAV(2)
Declared(3)
Fiscal year ending December 31, 2023
Second Quarter (through April 28, 2023)
N/A
9.10
7.91
--
First Quarter
11.88
9.75
8.50
(17.9)%
(28.5)%
0.35
Fiscal year ending December 31, 2022
Fourth Quarter
11.16
10.29
8.17
(7.8)%
(26.8)%
0.45
Third Quarter
12.56
12.70
8.04
1.1%
(36.0)%
Second Quarter
12.84
15.00
12.30
16.9%
(4.2)%
15.06
18.99
13.80
26.1%
(8.4)%
0.60
Fiscal year ending December 31, 2021
16.63
21.12
18.24
27.0%
9.7%
22.17
21.84
19.50
(1.5)%
(12.0)%
23.40
23.04
19.26
(17.7)%
23.36
24.18
3.5%
(21.9)%
For all periods presented in the table above, there was no return of capital included in any distribution.
The last reported closing price for our common stock on April 28, 2023 was $8.09 per share. As of April 28, 2023, we had 9 record holders of our common stock.
12
The following table summarizes our distributions declared for record dates since January 1, 2021:
Record Date
Payment Date
Distribution Per Share Declared(1)
March 15, 2021
March 31, 2021
June 15, 2021
June 30, 2021
September 15, 2021
September 30, 2021
December 15, 2021
December 31, 2021
March 15, 2022
March 30, 2022
June 23, 2022
June 30, 2022
September 15, 2022
September 30, 2022
December 15, 2022
December 30, 2022
March 15, 2023
Recent Developments
Our board set distributions for the quarter ending June 30, 2023 at a rate of $0.35 per share. The full amount of each distribution will be from distributable earnings. The schedule of distribution payments will be established by GECC pursuant to authority granted by our Board. The distribution will be paid in cash.
Interest Rate Risk
We are also subject to financial risks, including changes in market interest rates. As of March 31, 2023, approximately $117.3 million in principal amount of our debt investments bore interest at variable rates, which are generally based on LIBOR, SOFR or US prime rate, and many of which are subject to certain floors. Recently, interest rates have risen and a prolonged increase in interest rates will increase our gross investment income and could result in an increase in our net investment income if such increases in interest rates are not offset by a corresponding decrease in the spread over variable rates that we earn on any portfolio investments or an increase 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates. As of March 31, 2023, 23 debt investments in our portfolio bore interest at a fixed rate, and the remaining 27 debt investments were at variable rates, representing approximately $112.8 million and $117.3 million in principal debt, respectively. As of December 31, 2022, 31 debt investments in our portfolio bore interest at a fixed rate, and the remaining 23 debt investments were at variable rates, representing approximately $129.3 million and $100.8 million in principal debt, respectively. The variable rates are generally based upon the LIBOR, SOFR or US prime rate.
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 reference rate, and no other change in our portfolio as of March 31, 2023. We have also assumed 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.
Reference Rate Increase (Decrease)
Increase (decrease) of NetInvestment Income(in thousands)(1)
3.00%
3,670
2.00%
2,447
1.00%
1,223
-1.00%
(1,224
-2.00%
(2,448
-3.00%
(3,664
Although we believe that this analysis is indicative of our existing interest rate sensitivity at March 31, 2023, 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 March 31, 2023, 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.
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 March 31, 2023 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. A description of our legal proceedings is included in Note 7 of the unaudited consolidated financial statements attached to this report.
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, 2022.
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
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
Amendment to Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on March 2, 2022)
3.3
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)
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
Materials from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023, fomratted in inline Extensible Business Reporting Language (XBRL): (i) consolidated statements of assets and liabilities, (ii) consolidated statements of operations, (iii) consolidated statements of changes in net assets, (iv) consolidated statements of cash flows, (v) consolidated schedules of investments, and (vi) related notes to the consolidated financial statements, tagged in detail (furnished herewith)
104
The cover page from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023, formatted in inline XBRL (included as Exhibit 101)
* Filed herewith
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: May 4, 2023
By:
/s/ Matt Kaplan
Name:
Matt Kaplan
Title:
Chief Executive Officer
/s/ Keri A. Davis
Keri A. Davis
Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of March 31, 2023 and December 31, 2022 (unaudited)
Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 (unaudited)
Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2023 and 2022 (unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited)
Consolidated Schedule of Investments as of March 31, 2023 and December 31, 2022 (unaudited)
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)
Dollar amounts in thousands (except per share amounts)
Assets
Non-affiliated, non-controlled investments, at fair value (amortized cost of $182,982 and $183,061, respectively)
174,441
171,743
Non-affiliated, non-controlled short-term investments, at fair value (amortized cost of $80,570 and $76,140, respectively)
80,560
76,127
Affiliated investments, at fair value (amortized cost of $13,430 and $13,433, respectively)
1,464
1,304
Controlled investments, at fair value (amortized cost of $53,276 and $54,684, respectively)
51,034
51,910
Total investments
307,499
301,084
Cash and cash equivalents
1,641
587
Receivable for investments sold
415
396
Interest receivable
3,027
3,090
Dividends receivable
1,059
1,440
Due from portfolio company
Due from affiliates
Deferred financing costs
186
226
Prepaid expenses and other assets
233
3,288
Total assets
314,065
310,112
Liabilities
Notes payable (including unamortized discount of $2,499 and $2,781, respectively)
143,435
143,152
Revolving credit facility
10,000
Payable for investments purchased
72,317
70,022
Interest payable
27
42
Accrued incentive fees payable
1,274
565
Due to affiliates
1,104
1,042
Accrued expenses and other liabilities
600
480
Total liabilities
223,757
225,303
Commitments and contingencies (Note 7)
Net Assets
Common stock, par value $0.01 per share (100,000,000 shares authorized, 7,601,958 shares issued and outstanding and 7,601,958 shares issued and outstanding, respectively)
76
Additional paid-in capital
284,107
Accumulated losses
(193,875
(199,374
Total net assets
90,308
84,809
Total liabilities and net assets
Net asset value per share
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Investment Income:
Interest income from:
Non-affiliated, non-controlled investments
3,259
Non-affiliated, non-controlled investments (PIK)
449
246
Affiliated investments
30
21
Affiliated investments (PIK)
58
Controlled investments
442
457
Controlled investments (PIK)
Total interest income
Dividend income from:
318
503
616
764
Total dividend income
Other income from:
Total other income
Total investment income
Expenses:
Other expenses
Total expenses
4,357
Net expenses
Net investment income before taxes
2,867
6,055
Net investment income
2,839
5,954
Net realized and unrealized gains (losses):
Net realized gain (loss) on investment transactions from:
Total net realized gain (loss)
Net change in unrealized appreciation (depreciation) on investment transactions from:
2,781
16,536
163
(7,689
532
23
Total net change in unrealized appreciation (depreciation)
Net realized and unrealized gains (losses)
5,321
(11,063
Net increase (decrease) in net assets resulting from operations
8,160
(5,109
Net investment income per share (basic and diluted):
(1)
0.37
1.31
Earnings per share (basic and diluted):
1.07
(1.12
Weighted average shares outstanding (basic and diluted):
7,601,958
4,558,451
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)
Dollar amounts in thousands
Increase (decrease) in net assets resulting from operations:
Net realized gain (loss)
Distributions to stockholders:
Distributions(1)
(2,661
(2,761
Total distributions to stockholders
Capital transactions:
Issuance of common stock, net
2,600
Fractional shares redeemed for cash in lieu of reverse stock split
Net increase (decrease) in net assets resulting from capital transactions
Total increase (decrease) in net assets
5,499
(5,270
Net assets at beginning of period
74,556
Net assets at end of period
69,286
Capital share activity(2)
Shares outstanding at the beginning of the period
4,484,278
Issuance of common stock
117,117
(4
Shares outstanding at the end of the period
4,601,391
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Cash flows from operating activities
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities:
Purchases of investments
(50,355
(25,340
Net change in short-term investments
(4,481
(3
Capitalized payment-in-kind interest
(597
(405
Proceeds from sales of investments
21,932
19,720
Proceeds from principal payments
35,224
6,518
Net realized (gain) loss on investments
(1,845
19,933
Net change in unrealized (appreciation) depreciation on investments
(3,476
(8,870
(541
(396
Amortization of discount (premium) on long term debt
323
327
Increase (decrease) in operating assets and liabilities:
(Increase) decrease in interest receivable
(231
(Increase) decrease in dividends receivable
381
376
(Increase) decrease in due from portfolio company
81
(Increase) decrease in due from affiliates
(17
(Increase) decrease in prepaid expenses and other assets
3,055
211
Increase (decrease) in due to affiliates
771
(4,906
Increase (decrease) in interest payable
(15
Increase (decrease) in accrued expenses and other liabilities
120
244
Net cash provided by (used for) operating activities
8,715
2,135
Cash flows from financing activities
Borrowings under credit facility
2,000
Repayments under credit facility
(7,000
Payments of deferred financing costs
(2
Distributions paid
Net cash provided by (used for) financing activities
(7,661
(2,763
Net increase (decrease) in cash
1,054
(628
Cash and cash equivalents and restricted cash, beginning of period
9,145
Cash and cash equivalents and restricted cash, end of period
8,517
Supplemental disclosure of non-cash financing activities:
Common stock issued in-kind
Supplemental disclosure of cash flow information:
Cash paid for excise tax
157
128
Cash paid for interest
2,481
2,331
The following tables provide a reconciliation of cash and cash equivalents and restricted cash reported on the Consolidated Statements of Assets and Liabilities that sum to the total of the same such amounts on the Consolidated Statements of Cash Flows:
Total cash and cash equivalents and restricted cash shown on the Consolidated Statements of Cash Flows
March 31, 2022
9,132
Restricted cash
F-22
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
Portfolio Company
Security(1)
Notes
Interest Rate(2)
Initial Acquisition Date
Maturity
Par Amount / Quantity
Cost
Fair Value
Percentage of Class(3)
Investments at Fair Value
ANGUS Chemical Company1500 E Lake Cook RdBuffalo Grove, IL 60089
2nd Lien, Secured Loan
2, 6
1M L + 7.75%, 8.50% Floor (12.59%)
09/21/2022
11/24/2028
1,625
1,506
1,543
APTIM Corp.4171 Essen LaneBaton Rouge, LA 70809
1st Lien, Secured Bond
7.75%
03/28/2019
06/15/2025
4,200
3,500
Avanti Space LimitedCobham House 20 Black Friars Lane London, UK EC4V 6EB
Junior Priority E2 Notes
6, 7, 9, 10
12.50%
04/13/2022
04/13/2024
1,333
1,138
Junior Priority F Notes
5,282
4,552
Junior Priority G Notes
10/13/2024
1,554
1,339
Common Equity
6, 8, 10
n/a
1,722
1.39
Avation Capital SA65 Kampong Bahru Road,#01-01 Singapore 169370
2nd Lien, Secured Bond
7, 10
9.00%, (6.50% cash + 2.50% PIK)
02/04/2022
10/31/2026
4,556
4,025
Blackstone Secured Lending345 Park AvenueNew York, NY 10154
Common Stock
08/18/2022
190,000
4,405
4,737
*
Blue Ribbon, LLC110 E Houston St.San Antonio, TX 78205
1st Lien, Secured Loan
1M L + 6.00%, 6.75% Floor (10.66%)
02/06/2023
05/08/2028
1,973
1,516
1,450
Eagle Point Credit Company Inc600 Steamboat Road, Suite 202Greenwich, CT 06830
133,844
1,509
1,495
ECL Entertainment, LLC8978 Spanish Ridge AveLas Vegas, NV 89148
1M L + 7.50%, 8.25% Floor (12.42%)
03/31/2021
04/30/2028
4,671
4,637
4,627
Enservco / Heat Waves14133 County Rd 9 1/2Longmont, CO 80504
Term Loan
29.44%
03/24/2022
06/24/2026
1,786
1,808
1,965
Equitrans Midstream Corp.2200 Energy DriveCanonsburg, PA 15317
Preferred Equity
6, 10
9.75%
07/01/2021
250,000
5,275
5,068
First Brands, Inc.3255 West Hamlin RoadRochester Hills, MI 48309
6M L + 8.50%, 9.50% Floor (13.60%)
03/24/2021
03/30/2028
12,545
12,177
11,060
Flexsys Holdings 260 Springside Drive Akron, OH 44333
1M SOFR + 5.25%, 6.00% Floor (10.17%)
11/04/2022
11/01/2028
4,975
3,958
4,481
Florida Marine, LLC2360 5th StreetMendeville, LA 70471
1M SOFR + 10.02%, 12.02% Floor (14.88%)
03/17/2023
03/17/2028
4,860
4,859
Foresight Energy211 North Broadway, Suite 2600St. Louis, MO 63102
3M L + 8.00%, 9.50% Floor (13.16%)
07/29/2021
06/30/2027
6,061
FTAI Infrastructure Inc.1345 Avenue of the Americas, 45th FloorNew York, NY 10105
10.50%
06/29/2022
06/01/2027
1,904
1,976
GAC HoldCo Inc.Suite 1220, 407 - 2nd Street S.W. Calgary, AB T2P 2Y3
12.00%
07/27/2021
08/15/2025
6,850
7,152
7,261
Great Elm Healthcare Finance, LLC3100 West End Ave, Suite 750 Nashville, TN 37203
Subordinated Note
4, 6
11/17/2022
11/09/2027
4,375
88
87.50
Greenway Health, LLC4301 W. Boy Scout Blvd, Suite 800 Tampa, FL 33607
1st Lien, Secured Revolver
3M L + 3.75%, 3.75% Floor (8.91%)
01/27/2020
11/17/2023
(25
1st Lien, Secured Revolver - Unfunded
0.50%
8,026
Harvey Gulf Holdings LLC701 Poydras Street, Suite 3700New Orleans, LA 70139
Secured Loan A
3M SOFR + 5.00%, 6.00% Floor (9.94%)
08/10/2022
08/10/2027
441
434
436
Secured Loan B
3M SOFR + 10.04%, 11.04% Floor (14.98%)
6,730
6,549
6,747
ITP Live Production Group101 Greenwich Street, Floor 26New York, NY 10006
25.61%
12/22/2021
05/22/2026
1,456
1,473
1,595
Lenders Funding, LLC523 A AvenueCoronado, CA 92118
4, 6, 10
8.44%
09/20/2021
09/20/2026
9,549
2, 4, 6, 10
Prime + 1.25%, 1.25% Floor (9.25%)
09/20/2023
446
4,554
6,287
7,250
1,968
56.13
Lummus Technology Holdings5825 N. Sam Houston Parkway West, #600Houston, TX 77086
Unsecured Bond
9.00%
05/17/2022
07/01/2028
4,150
3,568
3,679
Mad Engine Global, LLC6740 Cobra WaySan Diego, CA, 92121
3M L + 7.00%, 8.00% Floor (12.16%)
06/30/2021
07/15/2027
2,888
2,831
Martin Midstream Partners LP4200 Stone RoadKilgore, TX 75662
11.50%
01/31/2023
02/15/2028
1,941
1,915
F-24
Maverick Gaming LLC12530 NE 144th StreetKirkland, WA 98034
3M L + 7.50%, 8.50% Floor (12.45%)
11/16/2021
09/03/2026
5,902
5,755
3,974
Newfold Digital Inc.5335 Gate ParkwayJacksonville, FL 32256
6.00%
06/28/2022
02/15/2029
1,522
1,351
NICE-PAK Products, Inc. Two Nice-Pak ParkOrangeburg, NY 10962
2, 6, 7
3M SOFR + 13.50%, 14.50% Floor (18.66%), (10.66% cash + 8.00% PIK)
09/30/2022
09/30/2027
8,847
8,594
7,950
Promissory Note
6, 8
09/30/2029
1,449
537
Warrants
880,909
2.56
NuStar Energy LP19003 1H-10 West San Antonio, TX 78257
2, 10
3M L + 6.77%, 6.77% Floor (11.50%)
12/22/2022
2,500
55
3M L + 6.88%, 6.88% Floor (11.62%)
12/12/2022
7,500
166
213
Par Petroleum, LLC825 Town & Country Lane, Suite 1500Houston, TX 77024
1M SOFR + 4.25%, 4.75% Floor (9.24%)
02/14/2023
02/28/2030
4,000
3,940
Perforce Software, Inc.400 First Avenue North #200 Minneapolis, MN 55401
Prime + 3.50%, 3.50% Floor (11.50%)
01/24/2020
07/01/2024
(361
PFS Holdings Corp.3747 Hecktown Road Easton, PA 18045
2, 5, 6
1M L + 7.00%, 8.00% Floor (11.78%)
11/13/2020
11/13/2024
1,052
921
5, 6, 8
5,238
12,378
543
5.20
PIRS Capital LLC1688 Meridian Ave Ste 700Miami Beach, FL 33139
Prime + 6.50%, 6.50% Floor (14.50%)
11/22/2021
12/31/2024
1,995
Prestige Capital Finance, LLC400 Kelby St., 10th Floor Fort Lee, NJ 07024
11.00%
06/15/2021
06/15/2023
3,000
02/08/2019
100
7,786
12,407
80.00
ProFrac Holdings II, LLC333 Shops BoulevardSuite 301Weatherford, Texas 76087
2, 6, 10
3M SOFR + 7.25%, 8.25% Floor (12.41%)
02/01/2023
03/04/2025
9,875
9,691
Research Now Group, Inc.5800 Tennyson Parkway Suite 600 Plano, TX 75024
6M L + 4.50%, 4.50% Floor (9.66%)
01/29/2019
06/14/2024
5,974
5,969
5,583
F-25
4,026
(264
3M L + 9.50%, 10.50% Floor (14.31%)
05/20/2019
12/20/2025
8,000
7,969
5,545
Ruby Tuesday Operations LLC333 E. Broadway AvenueMaryville, TN 37804
1M SOFR + 12.00%, 13.25% Floor (16.73%), (10.73% cash + 6.00% PIK)
02/24/2021
02/24/2025
2,244
2,164
1M SOFR + 16.00%, 17.25% Floor (20.73%)
508
311,697
775
2.81
SCIH Salt Holdings Inc.1875 Century Park East, Suite 320Los Angeles, CA 90067
6.63%
06/24/2022
05/01/2029
1,655
Sterling Commercial Credit, LLC10153 Grand River RdBrighton, MI 48116
4, 6, 7
02/03/2022
05/03/2025
10,152
8,652
3,280,000
7,843
6,262
Stone Ridge Opportunities Fund L.P.One Vanderbilt Ave., 65th FloorNew York, NY 10017
Private Fund
12/15/2022
3,000,000
3,216
Summit Midstream Holdings, LLC910 Louisiana Street, Suite 4200Houston, TX 77002
5.75%
04/15/2025
1,386
1,199
1,154
8.50%
10/19/2021
10/15/2026
3,822
3,840
Target Hospitality Corp.2170 Buckthorne Place, Suite 440The Woodlands, TX 77380
Secured Bond
9.50%
05/13/2021
03/15/2024
3,114
Traeger Inc.1215 E Wilmington Ave. Suite 200Salt Lake City, UT 84106
1M L + 3.25%, 4.00% Floor (8.08%)
03/30/2023
06/29/2028
3,241
2,564
2,555
TRU Taj Trust505 Park Avenue, 2nd FloorNew York, NY 10022
07/21/2017
16,000
611
United Insurance Holdings Corp.800 2nd Avenue S.Saint Petersburg, FL 33701
7.25%
12/20/2022
12/15/2027
17,500
8,456
11,375
Universal Fiber Systems640 State StreetBristol, TN 37620
Term Loan B
3M L + 13.12%, 14.12% Floor (18.28%), (9.28% cash + 9.00% PIK)
09/30/2021
09/29/2026
7,321
7,229
7,393
Term Loan C
2,823
2,777
2,644
F-26
3,383
1,682
1.50
Vantage Specialty Chemicals, Inc.1751 Lake Cook Rd., Suite 550Deerfield, IL 60015
1M SOFR + 4.75%, 5.25% Floor (9.60%)
03/03/2023
10/26/2026
4,840
4,782
Vector Group Ltd.4400 Biscayne BlvdMiami, FL 33137
07/08/2022
11/01/2026
750
716
761
W&T Offshore, Inc.5718 Westheimer Road, Suite 700Houston, TX 77057
11.75%
01/12/2023
02/01/2026
6,000
5,878
Investments in Special Purpose Acquisition Companies (SPAC) & De-SPAC Companies
AdTheorent Holding Company, Inc330 Hudson Street, 13th FloorNew York, NY 10013
8, 10
02/26/2021
4,166
Allego N.V.Industriepark Kleefse WaardWestervoortsedijk 73 KB6827 AV Arnhem, The Netherlands
03/17/2021
Apollo Strategic Growth Capital II9 West 57th Street, 43rd FloorNew York, NY 10019
02/10/2021
500
Ares Acquisition Corp245 Park Avenue, 44th FloorNew York, NY 10167
02/02/2021
20,000
18
BigBear.ai Holdings, Inc.6811 Benjamin Franklin Dr, Suite 200Columbia, MD 21046
02/09/2021
8,333
Biote Corp.1875 W. Walnut Hill Ln #100Irving, TX 75038
Healthcare
03/02/2021
400
Cartesian Growth Corporation505 5th Avenue, 15th FloorNew York, NY 10017
1,666
Catcha Investment CorpLevel 42, Suntec Tower Three,8 Temasek Blvd, Singapore 038988
02/12/2021
CC Neuberger Principal Holdings III200 Park Avenue, 58th FloorNew York, NY 10166
02/03/2021
CF Acquisition Corp VIII110 East 59th StreetNew York, NY 10022
03/12/2021
1,000
Compute Health Acquisition Corp.1105 North Market Street, 4th FloorWilmington, DE 19890
02/05/2021
125
Core Scientific, Inc.210 Barton Springs RoadAustin, Texas 78704
1,250
Dave Inc.750 N. San Vicente Blvd. 900WWest Hollywood, CA 90069
Consumer Finance
03/05/2021
F-27
Digital Transformation Opportunities Corp.10207 Cleatis CourtLos Angeles, CA 90077
03/10/2021
FAST Acquisition Corp II109 Old Branchville RoadRidgefield, CT 06877
03/16/2021
Fathom Digital Manufacturing Corporation1050 Walnut Ridge DriveHartland, WI 53029
FinServ Acquisition Corp II1345 Avenue of the AmericasNew York, NY 10105
02/18/2021
Forest Road Acquisition Corp. II1177 Avenue of the Americas, 5th FloorNew York, NY 10036
80
Forum Merger IV Corp1615 South Congress Avenue, Suite 103Delray Beach, FL 33445
03/18/2021
Freedom Acquisition I Corp14 Wall Street, 20th FloorNew York, NY 10005
625
Fusion Acquisition Corp II667 Madison Avenue, 5th FloorNew York, NY 10065
Ginko Bioworks Holdings, Inc.27 Drydock Avenue, 8th FloorBoston, MA 02210
Grove Collaborative Holdings, Inc.1301 Sansome StreetSan Francisco, CA 94111
03/23/2021
Iris Acquisition Corp2700 19th StreetSan Francisco, CA 94110
Jaws Mustang Acquisition Corporation1601 Washington Avenue, Suite 800Miami Beach, FL 33139
6,250
Kismet Acquisition Two Corp.850 Library Avenue, Suite 204Newark, DE 19715
326
L Catterton Asia Acquisition C8 Marina ViewAsia Square Tower 1, No 41-03Singapore, 018960
03/11/2021
5,933
Lanvin Group Holdings LtdBuilding S2, Bund Finance Center, No. 600, Zhongshan East 2nd RoadHuangpu District, Shanghai, China
03/19/2021
M3-Brigade Acquisition II Corp.1700 Broadway, 19th FloorNew York, NY 10019
03/04/2021
3,333
Movella Holdings Inc.3535 Executive Terminal Dr. Suite 110Henderson, NV 89052
02/17/2021
F-28
Northern Star Investment Corp. IIThe Chrysler Building405 Lexington AvenueNew York, NY 10174
01/26/2021
Northern Star Investment Corp. IIIThe Chrysler Building405 Lexington AvenueNew York, NY 10174
66
Northern Star Investment Corp. IVThe Chrysler Building405 Lexington AvenueNew York, NY 10174
Pear Therapeutics, Inc.200 State Street, 13th FloorBoston, MA 02109
Pivotal Investment Corp IIIThe Chrysler Building405 Lexington Avenue, 11th FloorNew York, NY 10174
Planet Labs PBC645 Harrison Street, 4th FloorSan Francisco, CA 94107
Plum Acquisition Corp. I2021 Fillmore Street, #2089San Francisco, CA 94115
1,600
Polestar Automotive Holding UK PLCAssar Gabrielssons Väg 9405 31 Göteborg, Sweden
RMG Acquisition Corp. III57 Ocean, Suite 4035775 Collins AvenueMiami Beach, FL 33140
Ross Acquisition Corp II1 Pelican LanePalm Beach, FL 33480
6,666
Rumble Inc. 444 Gulf of Mexico DriveLongboat Key, FL 34228
05/10/2021
Slam Corp.55 Hudson Yards, 47th Floor, Suite CNew York, NY 10001
04/26/2021
Sonder Holdings Inc.101 15th StreetSan Francisco, CA 94103
Sustainable Development Acquisition I Corp.5701 Truxtun Avenue, Suite 201Bakersfield, CA 90036
Tailwind International Acquisition Corp.150 Greenwich Street, 29th FloorNew York, NY 10006
02/19/2021
Terran Orbital Corporation6800 Broken Sound Pkwy NW, Suite 200Boca Raton, FL 33487
TLG Acquisition One Corp.515 North Flagler Drive, Suite 520West Palm Beach, FL 33401
01/28/2021
F-29
Tritium DCFC Ltd23 Archimedes Place Murarrie, QLD Australia
02/04/2021
Warburg Pincus Capital Corp I-B450 Lexington AvenueNew York, NY 10017
Total Investments in Special Purpose Acquisition Companies
154
46
Total Investments excluding Short-Term Investments (251.29% of Net Assets)
249,688
Short-Term Investments
United States Treasury
Treasury Bill
0.00%
03/31/2023
06/30/2023
70,000,000
69,751
69,741
GS Financial Square Treasury Obligations Fund
Money Market
06/30/2022
10,819,092
10,819
Total Short-Term Investments (89.21% of Net Assets)
80,570
TOTAL INVESTMENTS (340.50% of Net Assets)
330,258
Other Liabilities in Excess of Net Assets (240.50% of Net Assets)
(217,191
NET ASSETS
F-30
* Represents less than 1%.
As of March 31, 2023, the Company’s investments consisted of the following:
Investment Type
Percentage ofNet Assets
Debt
184,050
203.80
Equity/Other
42,889
47.49
89.21
340.50
As of March 31, 2023, the geographic composition of the Company’s portfolio at fair value was as follows:
Geography
United States
296,288
328.09
Canada
Europe
3,943
4.36
Asia/Oceania
F-31
As of March 31, 2023, the industry composition of the Company’s portfolio at fair value was as follows:
62.66
29.02
16.16
14.55
13.56
13.53
13.34
12.25
12.23
10.81
9.53
6.90
6.67
6.06
5.90
4.34
3.82
3.46
-0.35
F-32
CONSOLIDATED SCHEDULE OF INVESTMENTS
AgroFresh Inc.One Washington Square, 510-530 Walnut Street, Suite 1350, Philadelphia, PA 19106
1M L + 6.25%, 7.25% Floor (10.63%)
4,402
4,387
4,303
American Tower Corporation 116 Huntington AvenueBoston, MA 02116
Corporate Bond
3.50%
1M L + 7.75%, 8.50% Floor (12.07%)
1,502
1,505
1M SOFR + 4.75%, 5.50% Floor (12.14%)
11/24/2027
2,795
2,810
4,128
3,488
1,292
5,119
1.72
3,996
200,000
4,647
4,470
Crestwood Equity Partners LP811 Main Street, Suite 3400 Houston, TX 77002
9.25%
06/19/2020
216,178
1,288
1,872
1,355
1M SOFR + 7.50%, 8.25% Floor (11.88%)
4,433
4,397
4,418
22.29%
1,894
1,918
4,982
F-33
6M L + 8.50%, 9.50% Floor (11.87%)
12,162
11,800
1M SOFR + 5.25%, 6.00% Floor (9.69%)
4,987
3,936
4,052
3M L + 8.00%, 9.50% Floor (12.73%)
6,080
Forum Energy Technologies, Inc.10344 Sam Houston Park Drive, Suite 300Houston, TX 77064
1st Lien, Secured Convertible Bond
05/09/2022
08/04/2025
2,705
2,627
1,899
2,010
7,179
7,278
3M L + 3.75% (8.52%)
(34
3M SOFR + 5.00%, 6.00% Floor (9.36%)
488
479
3M SOFR + 10.04%, 11.04% Floor (14.40%)
6,825
6,631
6,726
19.71%
1,546
1,564
1,576
Prime + 1.25%, 1.25% Floor (8.75%)
1,555
3,445
2,205
62.87
F-34
3,549
3,475
3M L + 7.00%, 8.00% Floor (11.73%)
2,906
2,845
12/09/2020
02/28/2025
9,584
9,582
9,536
3M L + 7.50%, 8.50% Floor (12.23%)
5,919
5,763
4,883
1,508
1,375
3M SOFR + 13.50%, 14.50% Floor (18.08%), (10.08% cash + 8.00% PIK)
8,672
8,405
7,781
632
3M L + 6.77%, 6.77% Floor (11.41%)
57
3M L + 6.88%, 6.88% Floor (11.52%)
177
10/30/2020
12/15/2025
2,696
2,880
12.88%
01/15/2026
2,383
2,610
2,508
Prime + 3.25%, 3.25% Floor (10.75%)
1M L + 7.00%, 8.00% Floor (11.35%)
1,055
896
408
5.24
Prime + 6.50%, 6.50% Floor (14.00%)
1,997
F-35
11,638
Prime + 3.50%, 3.50% Floor (11.00%)
5,967
5,577
(267
6M L + 9.50%, 10.50% Floor (12.84%)
7,964
5,561
1M L + 12.00%, 13.25% Floor (16.06%), (10.06% cash + 6.00% PIK)
2,272
2,187
923
1,645
1,611
Sprout Holdings, LLC90 Merrick AveEast Meadow, NY 11554
06/23/2021
06/23/2023
873
8,500
1,180
1,173
4,800
4,762
4,985
2,469
3M L + 11.69%, 12.69% Floor (17.92%), (8.92% cash + 9.00% PIK)
7,172
7,072
7,192
2,766
2,716
2,576
F-36
1,246
3M L + 8.25%, 9.25% Floor (12.98%)
06/08/2021
10/26/2025
4,693
4,582
4,543
714
745
05/05/2021
11/01/2023
7,798
7,858
Agile Growth CorpRiverside Center275 Grove Street, Suite 2-400Newton, MA 02466
652
Arctos NorthStar Acquisition Corp.2021 McKinney Avenue, Suite 200Dallas, TX 75201
02/23/2021
F-37
Climate Real Impact Solutions II Acquisition Corporation300 Carnegie Center, Suite 150Princeton, NJ 08540
01/27/2021
Colonnade Acquisition Corp II1400 Centrepark Blvd, Suite 810West Palm Beach, FL 33401
D & Z Media Acquisition Corp2870 Peachtree Road NW, Suite 509Atlanta, GA 30305
ESM Acquisition Corp2229 San Felipe, Suite 1300Houston, TX 77019
Fast Radius, Inc.113 N. May St.Chicago , IL 60607
First Reserve Sustainable Growth Corp.262 Harbor Drive, 3rd FloorStamford, CT 06902
Frontier Acquisition Corp660 Madison Avenue, 19th FloorNew York, NY 10065
F-38
FTAC Athena Acquisition Corp.2929 Arch Street, Suite 1703Philadelphia, PA 19104
FTAC Hera Acquisition Corp.2929 Arch Street, Suite 1703Quakertown, PA 19104
G Squared Ascend I Inc.205 North Michigan Avenue, Suite 3770Chicago, IL 60601
Kismet Acquisition Three Corp.850 Library Avenue, Suite 204Newark, DE 19715
4,133
Lazard Growth Acquisition Corp30 Rockefeller PlazaNew York, NY 10112
Live Oak Mobility Acquisition Corp.4921 William Arnold RoadMemphis, TN 38117
New Vista Acquisition Corp.125 South Wacker Drive, Suite 300Chicago, IL 60606
F-39
Pathfinder Acquisition Corp1950 University Avenue, Suite 350Palo Alto, CA 94303
Peridot Acquisition Corp. II2229 San Felipe Street, Suite 1450Houston, TX 77019
03/09/2021
Sandbridge X2 Corp725 5th Avenue, 23rd FloorNew York, NY 10022
666
ScION Tech Growth II10 Queen St Place, 2nd FloorLondon, UK EC4R 1BE
Silver Spike Acquisition Corp II660 Madison Avenue, Suite 1600New York, NY 10065
F-40
Supernova Partners Acquisition Company III, Ltd.4301 50th Street NW, Suite 300 PMB 1044Washington, DC 20016
Tech and Energy Transition Corporation125 West 55th StreetNew York, NY 10019
VPC Impact Acquisition Holdings II150 North Riverside Plaza, Suite 5200Chicago, IL 60606
Warburg Pincus Capital Corp I-A450 Lexington AvenueNew York, NY 10017
201
Total Investments excluding Short-Term Investments (265.25% of Net Assets)
251,178
12/30/2022
69,798
69,785
6,341,888
6,342
Total Short-Term Investments (89.76% of Net Assets)
76,140
TOTAL INVESTMENTS (355.01% of Net Assets)
327,318
Other Liabilities in Excess of Net Assets (255.01% of Net Assets)
(216,275
F-41
F-42
As of December 31, 2022 the Company’s investments consisted of the following:
184,955
218.08
40,002
47.17
89.76
355.01
As of December 31, 2022 the geographic composition of the Company’s portfolio at fair value was as follows:
290,222
342.21
8.58
3,580
4.22
F-43
As of December 31, 2022 the industry composition of the Company’s portfolio at fair value was as follows:
68.68
37.38
26.60
17.85
14.44
13.92
10.97
9.92
7.13
6.87
6.47
6.35
5.88
4.32
3.67
3.53
3.39
2.80
2.76
-0.43
F-44
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except share and per share amounts
1. ORGANIZATION
Great Elm Capital Corp. (the “Company”) was formed on April 22, 2016 as a Maryland corporation. The Company is structured as an externally managed, non-diversified closed-end management investment company. The Company elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company is managed by Great Elm Capital Management, Inc., a Delaware corporation (“GECM”), a subsidiary of Great Elm Group, Inc., a Delaware corporation (“GEG”).
The Company seeks to generate current income and capital appreciation through debt and income generating equity investments, including investments in specialty finance businesses.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X and Regulation S-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. The Company is an investment company following accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies.
Retroactive Adjustments for Reverse Stock Split. The outstanding shares and per share amounts of the Company’s common stock in the consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted for the reverse stock split effected on February 28, 2022 for all activity prior to that date.
Basis of Consolidation. Under the Investment Company Act, Article 6 of Regulation S-X and GAAP, the Company is generally precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to the Company. The accompanying consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiary, Great Elm Specialty Finance, LLC. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Revenue Recognition. Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts, earned with respect to capital commitments, are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are generally included in interest income.
Interest income received as paid-in-kind (“PIK”) is reported separately in the Statements of Operations. Income is included as PIK if the instrument solely provides for settlement in kind. In the event that the borrower can settle in kind or via cash payment, the income is not included as PIK until the borrower elects to pay in kind and the payment is received by the Company. In the event there is a lesser cash rate in a PIK toggle instrument, income is accrued at the lesser cash rate until the coupon is paid in kind and such larger payment is received by the Company.
Certain of the Company’s debt investments were purchased at a discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method assuming there are no material questions as to collectability.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation). The Company measures 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 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.
Cash and Cash Equivalents. Cash and cash equivalents typically consist of bank demand deposits. Restricted cash generally consists of collateral for unfunded positions held by counterparties.
Valuation of Portfolio Investments. The Company carries its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Board.
Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 4.
The Company values its portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by the 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 the Company, (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (3) are able to transact for the asset, and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. The Company generally obtains market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. Short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of the Company’s investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with the Company’s documented valuation policy that has been reviewed and approved by the Board, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s 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 the Company may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where the Company believes that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security.
The valuation process approved by the 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:
F-46
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.
Investments in revolvers or delayed draw loans may include unfunded commitments for which the Company’s acquisition cost will be offset by compensation received on the portion of the commitment that is unfunded. As a result, the purchases of a commitment that is not fully funded may result in a negative cost basis for the funded commitment. The fair value of the unfunded commitment is adjusted for price appreciation or depreciation and may result in a negative fair value for the unfunded commitment.
Deferred Financing Costs and Deferred Offering Costs. Deferred financing costs and deferred offering costs consist of fees and expenses incurred in connection with financing or capital raising activities and include professional fees, printing fees, filing fees and other related expenses.
Deferred financing costs incurred in connection with the revolving credit facility are amortized on a straight-line basis over the term of the revolving credit facility. Unamortized costs are included in deferred financing costs on the consolidated statements of assets and liabilities and amortization of those costs is included in interest expense on the consolidated statements of operations.
Deferred offering costs incurred in connection with the unsecured notes are amortized over the term of the respective unsecured note using the effective interest method. Unamortized costs are treated as a reduction to the carrying amount of the debt on the consolidated statements of assets and liabilities and amortization of those costs is included in interest expense on the consolidated statements of operations.
Deferred offering costs incurred in connection with the shelf registration on form N-2 are capitalized when incurred and recognized as a reduction to offering proceeds when the offering becomes effective or expensed upon expiration of the registration statement, if applicable. Deferred offering costs are included with prepaid expenses and other assets on the consolidated statements of assets and liabilities.
Prepaid Expenses and Other Assets. Prepaid expenses include expenses paid in advance such as annual insurance premiums and deferred offering costs, as described above. Other assets may include contributions to investments paid in advance of trade date. As of March 31, 2023 and December 31, 2022, contributions to investments paid in advance of trade date were $0 and $3,000, respectively.
Foreign Currency Translation. Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (1) investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates effective on the date of valuation; and (2) purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates prevailing on the transaction dates. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.
U.S. Federal Income Taxes. From inception to September 30, 2016, the Company was a taxable association under Internal Revenue Code of 1986, as amended (the “Code”). The Company has elected to be taxed as a regulated investment company (“RIC”) under subchapter M of the Code. The Company intends to operate in a manner so as to qualify for the tax treatment applicable to RICs in that taxable year and all future taxable years. In order to qualify as a RIC, among other things, the Company will be required to timely distribute to its stockholders at least 90% of investment company taxable income (“ICTI”) including PIK interest, as defined by the Code, for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed prior to the 15th day of the ninth month after the tax year-end. So long as the Company maintains its status as a RIC, it generally will not be subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.
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If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.
The Company has accrued $28 of excise tax expense for the three months ended March 31, 2023. The Company accrued $252 of excise tax expense for the year ended December 31, 2022.
At December 31, 2022, the Company, for federal income tax purposes, had capital loss carryforwards of $185,737 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to stockholders, which would otherwise be necessary to relieve the Company of any liability for federal income tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed into law. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of the capital loss carryforwards at December 31, 2022, $41,899 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2022, $16,815 are short-term and $168,922 are long term.
ASC 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior years, as applicable), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES
Investment Management Agreement. The Company has an investment management agreement (the “Investment Management Agreement”) with GECM. Beginning on November 4, 2016, the Company began accruing for GECM’s fees for its services under the Investment Management Agreement. This fee consists of two components: a base management fee and an incentive fee.
The Company’s Chief Compliance Officer is also the president, general counsel and chief compliance officer of GECM, and the president of GEG. The Company’s Chief Financial Officer is also the chief financial officer of GECM.
Management Fee The base management fee is calculated at an annual rate of 1.50% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial quarter are prorated.
For the three months ended March 31, 2023 management fees amounted to $869. For the three months ended March 31, 2022 management fees amounted to $780. As of March 31, 2023 and December 31, 2022, $869 and $850, respectively, remained payable.
Incentive Fee The incentive fee consists of two components that are independent of each other with the result that one component may be payable even if the other is not. One component of the incentive fee is based on income (the “Income Incentive Fee”) and the other component is based on capital gains (the “Capital Gains Incentive Fee”).
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The Income Incentive Fee is calculated on a quarterly basis as 20% of the amount by which the Company’s pre-incentive fee net investment income (the “Pre-Incentive Fee Net Investment Income”) for the quarter exceeds a hurdle rate of 1.75% (7.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which GECM receives all of such income in excess of the 1.75% level but less than 2.1875% (8.75% annualized) and subject to a total return requirement (described below). The effect of the “catch-up” provision is that, subject to the total return provision, if pre-incentive fee net investment income exceeds 2.1875% of the Company’s net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Company’s pre-incentive fee net investment income as if the 1.75% hurdle rate did not apply. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.
Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, PIK interest, PIK dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Company and its consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee Net Investment Income does not include any realized capital gains or losses or unrealized capital appreciation or depreciation.
Any Income Incentive Fee otherwise payable with respect to Accrued Unpaid Income (collectively, the “Accrued Unpaid Income Incentive Fees”) is deferred, on a security by security basis, and becomes payable only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce Pre-Incentive Fee Net Investment Income and (2) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.
The Company will defer cash payment of any Income Incentive Fee otherwise payable to the investment adviser in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative Pre‑Incentive Fee Net Return (as defined below) during the most recent twelve full calendar quarter period ending on or prior to the date such payment is to be made (the “Trailing Twelve Quarters”) less (2) the aggregate incentive fees that were previously paid to the investment adviser during such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid). “Cumulative Pre‑Incentive Fee Net Return” during the relevant Trailing Twelve Quarters means the sum of (a) pre‑incentive fee net investment income in respect of such Trailing Twelve Quarters less (b) net realized capital losses and net unrealized capital depreciation, if any, in each case calculated in accordance with GAAP, in respect of such Trailing Twelve Quarters.
Under the Capital Gains Incentive Fee, the Company is obligated to pay GECM at the end of each calendar year 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.
In March 2022, GECM waived all accrued and unpaid incentive fees as of March 31, 2022. As of March 31, 2022, there were approximately $4.9 million of accrued fees. In connection with the waiver, the Company recognized the reversal of these accrued fees during the period ending March 31, 2022, resulting in a corresponding increase in net income in that period. The incentive fee waiver is not subject to recapture.
For the three months ended March 31, 2023 and 2022, the Company incurred Income Incentive Fees of $710 and $(4,854), inclusive of the incentive fee waiver as of March 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, $1,274 and $565 of Income Incentive Fees remained payable, respectively, and none was immediately payable after calculating the total return requirement. These payable amounts included both Accrued Unpaid Income Incentive Fees and amounts deferred under the total return requirement and would have become due upon meeting the criteria described above had they not been waived by GECM as of March 31, 2022. For the three months ended March 31, 2023 and the year ended December 31, 2022, the Company did not have any Capital Gains Incentive Fees accrual.
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On August 1, 2022, the Company's stockholders approved a proposal to amend the Capital Gains Incentive Fee and mandatory deferral provisions in sections 4.4 and 4.5, respectively, of the Investment Management Agreement. The amendment amended (i) section 4.4 of the Investment Management Agreement to provide that (x) the capital gains commencement date shall be April 1, 2022 and (y) for the year ending December 31, 2022, the Capital Gains Incentive Fee shall be calculated for the period beginning on the Capital Gains Commencement Date and ending on December 31, 2022 and (ii) section 4.5 of the Investment Management Agreement to provide that (x) the Trailing Twelve Quarters shall commence April 1, 2022 (the “Mandatory Deferral Commencement Date”) and (y) in the event the Trailing Twelve Quarters is less than twelve full calendar quarters, Trailing Twelve Quarters shall mean the period from the Mandatory Deferral Commencement Date through the quarter ending on or prior to the date such Income Incentive Fee payment is to be made.
The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as an investment adviser of the Company.
Administration Fees. The Company has an administration agreement (the “Administration Agreement”) with GECM to provide administrative services, including, among other things, furnishing the Company with office facilities, equipment, clerical, bookkeeping and record keeping services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement. Compensation of administrator personnel is allocated based on time allocation for the period. Other overhead expenses are based on a combination of time allocation and total headcount.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.
For the three months ended March 31, 2023 and 2022, the Company incurred expenses under the Administration Agreement of $295 and $221, respectively. As of March 31, 2023 and December 31, 2022, $220 and $188 remained payable, respectively.
4. FAIR VALUE MEASUREMENT
The fair value of a financial instrument is the amount that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).
The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities. The three levels of the fair value hierarchy are as follows:
Basis of Fair Value Measurement
Level 1 Investments valued using unadjusted quoted prices in active markets for identical assets.
Level 2 Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.
Level 3 Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Note 2 should be read in conjunction with the information outlined below.
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The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 and Level 3 Instruments.
Level 2 Instruments Valuation Techniques and Significant Inputs
Equity, Bank Loans, Corporate Debt, and Other Debt Obligations
The types of instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency may include commercial paper, most government agency obligations, certain corporate debt securities, certain mortgage-backed securities, certain bank loans, less liquid publicly-listed equities, certain state and municipal obligations, certain money market instruments and certain loan commitments.
Valuations of Level 2 debt and equity instruments can be verified to quoted prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
Level 3 Instruments Valuation Techniques and Significant Inputs
Bank Loans, Corporate Debt, and Other Debt Obligations
Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on an analysis of market comparables, transactions in similar instruments and/or recovery and liquidation analyses.
Equity
Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:
Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of March 31, 2023 and December 31, 2022. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment (if any), call provisions and comparable company valuations. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively, in the fair value.
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The following summarizes the Company’s investment assets categorized within the fair value hierarchy as of March 31, 2023:
Type of Investment
Level 1
Level 2
Level 3
Asset
98,025
86,025
33,124
39,673
Short Term Investments
87,109
119,149
304,283
Investment measured at net asset value(1)
Total Investments, at fair value
The following summarizes the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2022:
80,622
104,333
7,958
32,044
Total investment assets
84,085
136,377
The following is a reconciliation of Level 3 assets for the three months ended March 31, 2023:
Beginning Balance as of January 1, 2023
Net Transfers In/Out
Purchases(1)
Net Change in UnrealizedAppreciation (Depreciation)(2)
Sales and Settlements(1)
Net Amortization of Premium/ Discount
Ending Balance as of March 31, 2023
(14,312
11,647
284
258
(16,255
70
1,080
1,338
The following is a reconciliation of Level 3 assets for the year ended December 31, 2022:
Beginning Balance as of January 1, 2022
Ending Balance as of December 31, 2022
104,936
(6,311
66,461
(60,207
45,325
(46,314
443
49,088
12,538
(69,384
61,476
(21,674
154,024
78,999
(129,591
106,801
(67,988
Two investments with an aggregate fair value of $16,683 were transferred from Level 3 to Level 2 as a result of increased pricing transparency during the three months ended March 31, 2023. One investment with a fair value of $2,371 was transferred from Level 2 to Level 3 as a result of decreased pricing transparency during the three months ended March 31, 2023.
Two investments with an aggregate fair value of $6,311 were transferred from Level 3 to Level 2 as a result of increased pricing transparency during the year ended December 31, 2022.
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The following tables below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets as of March 31, 2023 and December 31, 2022, respectively. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien Debt is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 assets.
As of March 31, 2023
Fair value
Valuation Technique(1)
Unobservable Input(1)
Range (Weighted Average)(2)
47,433
Income Approach
Discount Rate
7.96% - 34.95% (19.50%)
21,352
Market Approach
Earnings Multiple
0.25 - 10.50 (4.22)
5,006
Implied Yield
3.32% - 28.26% (16.32%)
9,234
Recent Transaction
23.00% - 25.00% (24.00%)
4.50 - 5.50 (5.00)
Asset Recovery / Liquidation (3)
Total Debt
11,230
0.12 - 8.00 (4.23)
18.94% - 18.94% (18.94%)
Total Equity/Other
As of December 31, 2022
65,570
9.39% - 33.61% (17.55%)
20,687
0.25 - 9.50 (4.20)
4,945
3.95% - 26.49% (15.80%)
Broker Quotes
80.00% - 85.00% (82.50%)
24.00% - 26.00% (25.00%)
4.00 - 5.00 (4.50)
Asset Recovery / Liquidation(3)
Options Pricing Model
Volatility and Risk Free Rate
20.00% and 4.49%
11,044
0.12 - 8.50 (4.07)
19.07% - 19.07% (19.07%)
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The Company values investments in private funds using net asset value ("NAV") as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of FASB Accounting Standards Codification Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.
As of March 31, 2023 the Company held an investment in one private fund valued using NAV as a practical expedient. The Company has no unfunded commitments with respect to this investment. Withdrawals from the investment are permitted annually and there is no set duration for the private fund.
5. DEBT
On May 5, 2021, the Company entered into a Loan, Guarantee and Security Agreement (the “Loan Agreement”) with City National Bank (“CNB”). The Loan Agreement provides for a senior secured revolving line of credit of up to $25 million (subject to a borrowing base as defined in the Loan Agreement). The Company may request to increase the revolving line in an aggregate amount not to exceed $25 million, which increase is subject to the sole discretion of CNB. The maturity date of the revolving line is May 5, 2024. Borrowings under the revolving line bear interest at a rate equal to (i) the secured overnight financing rate ("SOFR") plus 3.50%, (ii) a base rate plus 2.00% or (iii) a combination thereof, as determined by the Company. As of March 31, 2023, there were $5.0 million borrowings outstanding under the revolving line of credit.
Borrowings under the revolving line are secured by a first priority security interest in substantially all of the Company’s assets, subject to certain specified exceptions. The Company has made customary representations and warranties and is required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar loan agreements. In addition, the Loan Agreement contains financial covenants requiring (i) net assets of not less than $65 million, (ii) asset coverage equal to or greater than 150% and (iii) bank asset coverage equal to or greater than 300%, in each case tested as of the last day of each fiscal quarter of the Company. Borrowings are also subject to the leverage restrictions contained in the Investment Company Act. In May 2022, the Loan Agreement was amended to require an asset coverage equal to or greater than 150% as of the last day of each fiscal quarter except for the fiscal quarters ending March 31, 2022 and June 30, 2022. In addition, the interest rate was amended to replace the LIBOR with SOFR.
Unsecured Notes
On January 11, 2018, the Company issued $43,000 in aggregate principal amount of 6.75% notes due 2025 (the "GECCM Notes"). On January 19, 2018 and February 9, 2018, the Company issued an additional $1,898 and $1,500 of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option.
On June 18, 2019, the Company issued $42,500 in aggregate principal amount of 6.50% notes due 2024 (the "GECCN Notes"), which included $2,500 of the GECCN Notes issued in connection with the partial exercise of the underwriters’ over-allotment option. On July 5, 2019, the Company issued an additional $2,500 of the GECCN Notes upon another partial exercise of the underwriters’ over-allotment option.
On June 23, 2021, the Company issued $50,000 in aggregate principal amount of 5.875% notes due 2026 (the "GECCO Notes"). On July 9, 2021, the Company issued an additional $7,500 of the GECCO Notes upon full exercise of the underwriters’ over-allotment option.
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The Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The unsecured notes are effectively subordinated, or junior in right of payment, to indebtedness under our Loan Agreement and any other future secured indebtedness that the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays interest on the unsecured notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes, GECCN Notes and GECCO Notes will mature on January 31, 2025, June 30, 2024 and June 30, 2026, respectively. The GECCM Notes and GECCN Notes are currently callable at the Company’s option and the GECCO Notes can be called on or after June 30, 2023. Holders of the unsecured notes do not have the option to have the unsecured notes repaid prior to the stated maturity date. The unsecured notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
As part of the offerings, the Company incurred fees and costs, which are treated as a reduction of the carrying amount of the debt on the Company's consolidated statements of assets and liabilities. These deferred financing costs presented as a reduction to the Notes payable balance are being amortized into interest expense over the term of the Notes.
The Company may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder.
Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following table:
As of
Total AmountOutstanding(1)
Asset CoverageRatio Per Unit(2)
Involuntary LiquidationPreference Per Unit(3)
Average MarketValue Per Unit(4)
December 31, 2016
2020 Notes
33,646
6,168
1.02
December 31, 2017
GECCL Notes
32,631
5,010
December 31, 2018
2,393
1.01
46,398
December 31, 2019
1,701
45,000
1.00
December 31, 2020
30,293
1,671
0.84
1,511
1,544
0.99
1,598
0.96
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The terms of the unsecured notes are governed by a base indenture, dated as of September 18, 2017, by and between the Company and American Stock Transfer & Trust Company, LLC, as trustee (as supplemented with respect to each series of notes, the “Indenture”). The Indenture’s covenants, include restrictions on certain activities in the event the Company falls below the minimum asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the Investment Company Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Investment Company Act limits, with certain exceptions, the Company’s borrowing such that its asset coverage ratio, as defined in the Investment Company Act, is at least 1.5 to 1 after such borrowing.
As of March 31, 2023, the Company’s asset coverage ratio was approximately 159.8%.
As of March 31, 2023 and December 31, 2022, the Company was in compliance with all covenants under the Indenture.
For the three months ended March 31, 2023 and 2022, the components of interest expense were as follows:
Borrowing interest expense
2,498
2,343
Amortization of acquisition premium
Weighted average interest rate(1)
7.42
Average outstanding balance
154,278
145,933
The fair value of the Company’s Notes are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s Notes is determined by utilizing market quotations at the measurement date as they are Level 1 securities.
Facility
Commitments
BorrowingsOutstanding
FairValue
Unsecured Debt - GECCM Notes
44,205
Unsecured Debt - GECCN Notes
41,747
Unsecured Debt - GECCO Notes
55,177
141,129
45,081
42,686
54,510
142,277
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6. CAPITAL ACTIVITY
On June 13, 2022, the Company completed a 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 $12.50 per share. In total, the Company sold 3,000,567 shares of the Company's common stock for aggregate gross proceeds of approximately $37,507.
On February 28, 2022, the Company effected a 6-for-1 reverse stock split of the Company’s outstanding common stock. As a result of the reverse stock split, every six shares of the Company’s issued and outstanding common stock were converted into one share of issued and outstanding common stock. Any fractional shares as a result of the reverse stock split were redeemed for cash at the closing market price on the business day immediately prior to the effective date of the reverse stock split. Such fractional shares aggregated to the equivalent of four shares and were redeemed for $0.1 in aggregate.
On February 3, 2022, the Company issued 117,117 shares of common stock (as adjusted for the reverse stock split described above) for $2,600 based on the most recently published net asset value. This common stock was issued in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of March 31, 2023, the Company had approximately $20,981 in unfunded loan commitments, subject to the Company’s approval in certain instances, to provide debt financing to certain of its portfolio companies. To the degree applicable, unrealized gains or losses on these commitments as of March 31, 2023 are included in the Company’s Statements of Assets and Liabilities and the corresponding Schedule of Investments. The Company believes that it had sufficient cash and other liquid assets on its balance sheet to satisfy the unfunded commitments. In addition, the Company has the ability to draw on its revolving line of credit to manage cash flows. The Company has considered the net increases in net assets and positive cash flows from operations and has concluded that it has the ability to meet its obligations in the ordinary course of business based upon an evaluation of its cash position and sources of liquidity.
From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company rights under contracts with the Company portfolio companies.
The Company is named as a defendant in a lawsuit filed on March 5, 2016, and captioned Intrepid Investments, LLC v. London Bay Capital, which is pending in the Delaware Court of Chancery. The plaintiff immediately agreed to stay the action in light of an ongoing mediation among parties other than the Company. This lawsuit was brought by a member of Speedwell Holdings (formerly known as The Selling Source, LLC), one of the Company’s portfolio investments, against various members of and lenders to Speedwell Holdings. The plaintiff asserts claims of aiding and abetting, breaches of fiduciary duty, and tortious interference against the Company. In June 2018, Intrepid Investments, LLC (“Intrepid”) sent notice to the court and defendants effectively lifting the stay and triggering defendants’ obligation to respond to the Intrepid complaint. In September 2018, the Company joined the other defendants in a motion to dismiss on various grounds. In February 2019, Intrepid filed a second amended complaint to which defendants filed a renewed motion to dismiss in March 2019. The Company intends to defend the matter as necessary.
In July 2016, Full Circle Capital Corporation ("Full Circle") filed suit in the District Court of Caldwell County, Texas against, among others, Willis Pumphrey for breach of a guaranty agreement arising from a loan transaction with Full Circle. Dr. Pumphrey, a personal guarantor of the loan made by Full Circle, the Company’s predecessor in interest, brought counterclaims in (i) the District Court of Caldwell County, Texas and (ii) the District Court of Harris County, Texas against, among others, Justin Bonner, an employee of GECM, in each case, alleging breach of a confidentiality agreement and tortious interference with Dr. Pumphrey’s attempted sale of a business in which he owned an interest. In August 2017, Dr. Pumphrey voluntarily withdrew his complaint against Mr. Bonner and Full Circle in the District Court of Harris County, Texas. In November 2017, Dr. Pumphrey voluntarily withdrew his complaint without prejudice against Full Circle in the District Court of Caldwell County, Texas. On November 29, 2017, Dr. Pumphrey refiled his claims in the District Court of Harris County, Texas naming Full Circle, MAST Capital Management, LLC, GECC and GECM as defendants. Dr. Pumphrey is seeking between $2 million and $6 million in damages. GECC believes Dr. Pumphrey’s claims to be frivolous and intends to vigorously defend them. Furthermore, the Company continues to pursue the initial claims against Dr. Pumphrey in the District Court of Caldwell County, Texas. In September 2019, the Company received a judgment in the Company’s favor from the District Court of Caldwell County, Texas. On June 4, 2020, Dr. Pumphrey, filed a Chapter 11 Bankruptcy Petition in the United States Bankruptcy Court for the Southern District of Texas. The Company is pursuing claims against Dr. Pumphrey in the Chapter 11 proceeding.
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8. INDEMNIFICATION
Under the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business the Company expects to enter into contracts that contain a variety of representations which provide general indemnifications. The Company’s maximum exposure under these agreements cannot be known; however, the Company expects any risk of loss to be remote.
9. FINANCIAL HIGHLIGHTS
Below is the schedule of financial highlights of the Company:
Per Share Data:(1)
Net asset value, beginning of period
Net realized gains (loss)
Net change in unrealized appreciation (depreciation)
0.15
Distributions declared from net investment income(2)
(0.35
(0.60
Net decrease resulting from distributions to common stockholders
Net asset value, end of period
Per share market value, end of period
9.00
14.68
Shares outstanding, end of period
Total return based on net asset value(3)
9.59
(5.83
Total return based on market value(3)
12.79
(17.32
Ratio/Supplemental Data:
Net assets, end of period
Ratio of total expenses to average net assets before waiver (4),(5)
22.96
24.49
Ratio of total expenses to average net assets after waiver (4),(5),(6)
17.91
Ratio of incentive fees to average net assets(4)
0.80
—
Ratio of net investment income to average net assets(4),(5),(6)
15.38
12.62
Portfolio turnover
24
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10. AFFILIATED AND CONTROLLED INVESTMENTS
Affiliated investments are defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company's outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at March 31, 2023 represented 2% of the Company's net assets.
Controlled investments are defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio company's outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at March 31, 2023 represented 57% of the Company's net assets.
Fair value as of March 31, 2023 along with transactions during the three months ended March 31, 2023 in these affiliated investments and controlled investments was as follows:
Issue(1)
Fair value at December 31, 2022
Gross Additions(2)
Gross Reductions(3)
Net RealizedGain (Loss)
Change in UnrealizedAppreciation (Depreciation)
Fair value at March 31, 2023
InterestIncome(4)
FeeIncome
DividendIncome
Non-Controlled, Affiliated Investments
PFS Holdings Corp.
Common Equity (5% of class)
135
Totals
Controlled Investments
Great Elm Healthcare Financing, LLC
129
Equity (88% of class)
8,750
Lenders' Funding, LLC
451
208
165
Equity (56% of class)
(237
13,760
1,725
11,963
232
Prestige Capital Finance, LLC
Equity (80% of class)
769
14,638
15,407
Sterling Commercial Credit, LLC
152
14,762
14,914
317
675
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11. SUBSEQUENT EVENTS
Our board set distributions for the quarter ending June 30, 2023 at a rate of $0.35 per share. The full amount of each distribution will be from distributable earnings. The schedule of distribution payments will be established by the Company pursuant to authority granted by our Board. The distribution will be paid in cash.
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