As of September 30, 2020, the industry composition of the Company’s portfolio at fair value was as follows:
As of September 30, 2020, the geographic composition of the Company’s portfolio at fair value was as follows:
As of December 31, 2019 the geographic composition of the Company’s portfolio at fair value was as follows:
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 Capital Group, Inc., a Delaware corporation (“Great Elm Capital Group”).
The Company seeks to generate current income and capital appreciation through debt and equity investments. The Company invests primarily in secured and senior unsecured debt instruments that it purchases in the secondary markets.
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.
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, TFC-SC Holdings, 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.
F-15
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 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 Company’s board of directors (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.
F-16
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:
|
|
▪
|
The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to an independent valuation firm (or firms) approved by the Board;
|
|
|
▪
|
Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented, discussed, and iterated with senior management of GECM;
|
|
|
▪
|
The fair value of investments comprising in the aggregate less than 5% of the Company’s total capitalization and individually less than 1% of the Company’s total capitalization may be determined by GECM in good faith in accordance with the Company’s valuation policy without the employment of an independent valuation firm.
|
|
|
▪
|
The Company’s audit committee recommends, and the Board approves, the fair value of the investments in the Company’s portfolio in good faith based on the input of GECM, the independent valuation firms (to the extent applicable) and the business judgment of the audit committee and the Board, respectively.
|
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that 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.
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.
F-17
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 not accrued any excise tax expense for the three and nine months ended September 30, 2020. The Company accrued $209 of excise tax expense for the year ended December 31, 2019.
At December 31, 2019, the Company, for federal income tax purposes, had capital loss carryforwards of $45,137 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 shareholders, 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 by the President. 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, 2019, $45,137 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2019, $16,815 are short-term and $28,322 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.
Recent Accounting Developments
Fair Value Measurements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, resulting in various disclosures related to fair value measurements being eliminated, modified or supplemented. ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019, with an option to early adopt any eliminated or modified disclosures, and to delay adoption of the additional disclosures, until the effective date. On September 1, 2018, the Company early adopted the eliminated and modified disclosures of ASU 2018-13 and, as a result, updated its financial statement disclosures accordingly. On January 1, 2020, the Company adopted the additional disclosures of ASU 2018-13 and there was no impact to the financial statement disclosures.
Reference Rate Reform In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of the London Interbank Offered Rate (“LIBOR”) by the end of 2021. If LIBOR ceases to exist, the Company may need to renegotiate outstanding loans to our portfolio companies which extend beyond 2021, and that utilize LIBOR as a factor in determining the interest rate, to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), to facilitate the effects of reference rate reform on financial reporting. The provisions provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted the amendments as of March 12, 2020 on a prospective basis and there was no impact to the accompanying financial statements and related disclosures.
F-18
Significant Subsidiaries In May 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to improve financial disclosures about acquisitions and dispositions of businesses. The rule established investment company-specific disclosure requirements in the event of a fund acquisition and tailored the definition of a significant subsidiary for investment companies. The amendments will be effective on January 1, 2021, but voluntary compliance is permitted in advance of the effective date. The Company adopted the amendments as of June 30, 2020. Under the amended definition of a significant subsidiary, none of the Company’s investments are deemed to be significant subsidiaries.
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 Executive Officer is also the chief investment officer of GECM, and the chief executive officer and a member of the board of directors of GEC. The Company’s Chief Compliance Officer is also the chief operating officer, chief compliance officer and general counsel of GECM, and the president and chief operating officer of GEC. 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 and nine months ended September 30, 2020 management fees amounted to $609 and $1,898, respectively. For the three and nine months ended September 30, 2019 management fees amounted to $759 and $2,207, respectively. As of September 30, 2020 and December 31, 2019, $609 and $746 remained payable, respectively.
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”).
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. Accrued Unpaid Income as of September 30, 2020 was $25,001. Accrued Unpaid Income includes capitalized PIK income of $14,048 on investments still held at September 30, 2020. Accrued Unpaid Income as of December 31, 2019 was $23,495, which included capitalized PIK income of $12,279 on investments still held at December 31, 2019.
F-19
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.
For the nine months ended September 30, 2020 and 2019, the Company incurred Income Incentive Fees of $810 and $2,099, respectively. As of September 30, 2020 and December 31, 2019, $8,967 and $8,157 of Income Incentive Fees, respectively, remained payable and none was immediately payable after calculating the total return requirement. These payable amounts may include both Accrued Unpaid Income Incentive Fees and amounts deferred under the total return requirement and will become due upon meeting the criteria described above. For the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company did not have any Capital Gains Incentive Fees accrual.
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.
GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the “Compensation Expenses”), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period.
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.
F-20
For the nine months ended September 30, 2020 and 2019, the Company incurred expenses under the Administration Agreement of $547 and $734, respectively. As of September 30, 2020 and December 31, 2019, $222 and $176 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
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Level 1
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Investments valued using unadjusted quoted prices in active markets for identical assets.
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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.
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
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Equity, Bank Loans, Corporate Debt, and Other Debt Obligations
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|
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.
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F-21
Level 3 Instruments Valuation Techniques and Significant Inputs
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Bank Loans, Corporate Debt, and Other Debt Obligations
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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.
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|
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:
▪ Transactions in similar instruments;
▪ Discounted cash flow techniques;
▪ Third party appraisals; and
▪ Industry multiples and public comparables.
Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:
▪ Current financial performance as compared to projected performance;
▪ Capitalization rates and multiples; and
▪ Market yields implied by transactions of similar or related assets.
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As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of September 30, 2020 and December 31, 2019. 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.
The following summarizes the Company’s investment assets categorized within the fair value hierarchy as of September 30, 2020:
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Assets
|
|
Level 1
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|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Debt
|
|
$
|
-
|
|
|
$
|
28,001
|
|
|
$
|
108,061
|
|
|
$
|
136,062
|
|
|
Equity/Other
|
|
|
12,710
|
|
|
|
-
|
|
|
|
20,714
|
|
|
|
33,424
|
|
|
Short Term Investments
|
|
|
74,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,980
|
|
|
Total investment assets
|
|
$
|
87,690
|
|
|
$
|
28,001
|
|
|
$
|
128,775
|
|
|
$
|
244,466
|
|
The following summarizes the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2019:
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Debt
|
|
$
|
-
|
|
|
$
|
53,635
|
|
|
$
|
120,431
|
|
|
$
|
174,066
|
|
|
Equity/Other
|
|
|
-
|
|
|
|
-
|
|
|
|
23,549
|
|
|
|
23,549
|
|
|
Short Term Investments
|
|
|
85,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,733
|
|
|
Total investment assets
|
|
$
|
85,733
|
|
|
$
|
53,635
|
|
|
$
|
143,980
|
|
|
$
|
283,348
|
|
F-22
The following is a reconciliation of Level 3 assets for the nine months ended September 30, 2020:
|
Level 3
|
|
Beginning Balance as of January 1, 2020
|
|
|
Net Transfers In/Out
|
|
|
Purchases(1)
|
|
|
Net Realized Gain (Loss)
|
|
|
Net Change in Unrealized
Appreciation (Depreciation)(2)
|
|
|
Sales and Settlements(1)
|
|
|
Net Amortization of Premium/ Discount
|
|
|
Ending Balance as of September 30, 2020
|
|
|
Debt
|
|
$
|
120,431
|
|
|
$
|
(3,735
|
)
|
|
$
|
65,342
|
|
|
$
|
(1,094
|
)
|
|
$
|
(20,737
|
)
|
|
$
|
(54,840
|
)
|
|
$
|
2,694
|
|
|
$
|
108,061
|
|
|
Equity/Other
|
|
|
23,549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,011
|
)
|
|
|
(824
|
)
|
|
|
-
|
|
|
|
20,714
|
|
|
Total investment assets
|
|
$
|
143,980
|
|
|
$
|
(3,735
|
)
|
|
$
|
65,342
|
|
|
$
|
(1,094
|
)
|
|
$
|
(22,748
|
)
|
|
$
|
(55,664
|
)
|
|
$
|
2,694
|
|
|
$
|
128,775
|
|
The following is a reconciliation of Level 3 assets for the year ended December 31, 2019:
|
Level 3
|
|
Beginning Balance as of January 1, 2019
|
|
|
Net Transfers In/Out
|
|
|
Purchases(1)
|
|
|
Net Realized Gain (Loss)
|
|
|
Net Change in Unrealized
Appreciation (Depreciation)(2)
|
|
|
Sales and Settlements(1)
|
|
|
Net Amortization of Premium/ Discount
|
|
|
Ending Balance as of December 31, 2019
|
|
|
Debt
|
|
$
|
116,034
|
|
|
$
|
-
|
|
|
$
|
120,050
|
|
|
$
|
(313
|
)
|
|
$
|
(6,210
|
)
|
|
$
|
(112,879
|
)
|
|
$
|
3,749
|
|
|
$
|
120,431
|
|
|
Equity/Other
|
|
|
-
|
|
|
|
6,231
|
|
|
|
32,935
|
|
|
|
-
|
|
|
|
(14,003
|
)
|
|
|
(1,614
|
)
|
|
|
-
|
|
|
|
23,549
|
|
|
Total investment assets
|
|
$
|
116,034
|
|
|
$
|
6,231
|
|
|
$
|
152,985
|
|
|
$
|
(313
|
)
|
|
$
|
(20,213
|
)
|
|
$
|
(114,493
|
)
|
|
$
|
3,749
|
|
|
$
|
143,980
|
|
|
(1)
|
Purchases may include new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings, capitalized PIK income, and securities received in corporate actions and restructurings. Sales and Settlements may include scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities), and securities delivered in corporate actions and restructuring of investments.
|
|
(2)
|
The net change in unrealized depreciation relating to Level 3 assets still held at September 30, 2020 totaled $(22,803) consisting of the following: $(20,792) related to debt investments and $(2,011) related to equity. The net change in unrealized depreciation relating to Level 3 assets still held at December 31, 2019 totaled $(20,664) consisting of the following: $(6,661) related to debt investments and $(14,003) relating to equity/other.
|
One investment with a fair value of $(11,801) was transferred from Level 3 to Level 2 as a result of increased pricing transparency during the nine months ended September 30, 2020. Two investments with an aggregate fair value of $8,066 were transferred from Level 2 to Level 3 as a result of decreased pricing transparency during the nine months ended September 30, 2020.
One investment with a fair value of $2,353 was transferred from Level 1 to Level 3 during the year ended December 31, 2019 as a result of the shares being delisted from their primary exchange.
The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets as of September 30, 2020 and December 31, 2019, 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.
F-23
|
As of September 30, 2020
|
|
Investment Type
|
|
Fair value
|
|
|
Valuation Technique(1)
|
|
Unobservable Input(1)
|
|
Range (Weighted Average)(2)
|
|
Debt
|
|
$
|
49,190
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
3.50 - 9.50 (5.05)
|
|
|
|
|
|
|
|
Income Approach
|
|
Discount Rate
|
|
6.16% - 30.00% (16.00%)
|
|
|
|
|
3,444
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
8.00
|
|
|
|
|
|
|
|
Income Approach
|
|
Discount Rate
|
|
25.00%
|
|
|
|
|
|
|
|
Quotes
|
|
|
|
$1.83 - $32.60 ($30.06)
|
|
|
|
|
13,582
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
4.50 - 6.25 (5.60)
|
|
|
|
|
38,731
|
|
|
Income Approach
|
|
Discount Rate
|
|
2.73% - 40.00% (15.80%)
|
|
|
|
|
2,241
|
|
|
Income Approach
|
|
Implied Yield
|
|
3.98% - 7.49% (6.94%)
|
|
|
|
|
873
|
|
|
Asset Recovery / Liquidation(4)
|
|
|
|
|
|
Total Debt
|
|
$
|
108,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity/Other
|
|
$
|
11,242
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
2.50 - 4.50 (2.90)
|
|
|
|
|
|
|
|
Income Approach
|
|
Discount Rate
|
|
15.50% - 37.00% (33.68%)
|
|
|
|
|
8,635
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
4.10
|
|
|
|
|
837
|
|
|
Asset Recovery / Liquidation(4)
|
|
|
|
|
|
Total Equity/Other
|
|
$
|
20,714
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Investment Type
|
|
Fair value
|
|
|
Valuation Technique(1)
|
|
Unobservable Input(1)
|
|
Range (Weighted Average)(2)
|
|
|
Debt
|
|
$
|
9,054
|
|
|
Market Approach
|
|
EBITDA Multiple
|
|
5.50
|
|
|
|
|
|
(1,262
|
)
|
|
|
|
Implied Yield
|
|
4.09% - 8.09% (7.03%)
|
|
|
|
|
|
38,225
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
4.25
|
|
|
|
|
|
|
|
|
Income Approach
|
|
Discount Rate
|
|
12.75%
|
|
|
|
|
|
73,334
|
|
|
Income Approach
|
|
Discount Rate
|
|
3.45% - 32.50% (12.70%)
|
|
|
|
|
|
1,080
|
|
|
Asset Recovery / Liquidation(4)
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
120,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity/Other
|
|
$
|
10,079
|
|
|
Market Approach
|
|
Earnings Multiple
|
|
2.80 - 4.25 (3.41)
|
|
|
|
|
|
|
|
|
Income Approach
|
|
Discount Rate
|
|
12.75% - 39.00% (32.87%)
|
|
|
|
|
|
11,996
|
|
|
Market Approach
|
|
Comparable Price(3)
|
|
6.00 - 11.00 (8.75)
|
|
|
|
|
|
1,474
|
|
|
Asset Recovery / Liquidation(4)
|
|
|
|
|
|
|
|
Total Equity/Other
|
|
$
|
23,549
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fair value of any one instrument may be determined using multiple valuation techniques or unobservable inputs.
|
|
(2)
|
Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. The range and weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.
|
|
(3)
|
Comparable price may include broker quotes for the exact security or similar securities.
|
|
(4)
|
Investments valued using the asset recovery or liquidation technique include investments for which valuation is based on current financial data without a discount rate applied.
|
F-24
5. DEBT
On September 13, 2017, the Company offered $28,375 in aggregate principal amount of 6.50% notes due 2022 (the "GECCL Notes"). On September 29, 2017, the Company sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise of the underwriters’ over-allotment option.
The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays interest on the GECCL Notes on January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
On January 11, 2018, the Company offered $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 sold an additional $1,898 and $1,500 of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option.
The GECCM Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCM Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays interest on the GECCM Notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes will mature on January 31, 2025 and can be called on, or after, January 31, 2021. Holders of the GECCM Notes do not have the option to have the GECCM Notes repaid prior to the stated maturity date. The GECCM Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
On June 18, 2019, the Company offered $42,500 in aggregate principal amount of 6.50% notes due 2024 (the "GECCN Notes"), which included $2,500 of the GECCN Notes sold in connection with the partial exercise of the underwriters’ over-allotment option. On July 5, 2019, the Company sold an additional $2,500 of the GECCN Notes upon another partial exercise of the underwriters’ over-allotment option.
The GECCN Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCN Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays interest on the GECCN Notes on March 31, June 30, September 30 and December 31 of each year beginning September 30, 2019. The GECCN Notes will mature on June 30, 2024 and can be called on, or after, June 30, 2021. Holders of the GECCN Notes do not have the option to have the GECCN Notes repaid prior to the stated maturity date. The GECCN Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
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 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. During the nine months ended September 30, 2020, the Company repurchased $2,338 in principal amount of the GECCL Notes, $788 in principal amount of the GECCM Notes and $2,178 in principal amount of the GECCN Notes.
F-25
Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following table:
|
As of
|
|
Total Amount
Outstanding(1)
|
|
|
Asset Coverage
Ratio Per Unit(2)
|
|
|
Involuntary Liquidation
Preference Per Unit(3)
|
|
Average Market
Value Per Unit(4)
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Notes
|
|
$
|
33,646
|
|
|
$
|
6,168
|
|
|
N/A
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
5,010
|
|
|
N/A
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
2,393
|
|
|
N/A
|
|
$
|
1.01
|
|
|
GECCM Notes
|
|
|
46,398
|
|
|
|
2,393
|
|
|
N/A
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
1,701
|
|
|
N/A
|
|
$
|
1.01
|
|
|
GECCM Notes
|
|
|
46,398
|
|
|
|
1,701
|
|
|
N/A
|
|
|
1.01
|
|
|
GECCN Notes
|
|
|
45,000
|
|
|
|
1,701
|
|
|
N/A
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECCL Notes
|
|
$
|
30,293
|
|
|
$
|
1,509
|
|
|
N/A
|
|
$
|
0.87
|
|
|
GECCM Notes
|
|
|
45,610
|
|
|
|
1,509
|
|
|
N/A
|
|
|
0.82
|
|
|
GECCN Notes
|
|
|
42,823
|
|
|
|
1,509
|
|
|
N/A
|
|
|
0.82
|
|
|
(1)
|
Total amount of each class of senior securities outstanding at the end of the period presented.
|
|
(2)
|
Asset coverage per unit is the ratio of the carrying value of Great Elm’s total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
|
|
(3)
|
The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.
|
|
(4)
|
The average market value per unit for the Notes, as applicable, is based on the average daily prices of such Notes and is expressed per $1 of indebtedness.
|
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 September 30, 2020, the Company’s asset coverage ratio was approximately 150.9%.
As of September 30, 2020 and December 31, 2019, the Company was in compliance with all covenants under the indenture.
F-26
For the three and nine months ended September 30, 2020 and 2019, the components of interest expense were as follows:
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Borrowing interest expense
|
|
$
|
1,954
|
|
|
$
|
2,049
|
|
|
$
|
6,014
|
|
|
$
|
4,776
|
|
|
Amortization of acquisition premium
|
|
|
271
|
|
|
|
259
|
|
|
|
906
|
|
|
|
557
|
|
|
Total
|
|
$
|
2,225
|
|
|
$
|
2,308
|
|
|
$
|
6,920
|
|
|
$
|
5,333
|
|
|
Weighted average interest rate(1)
|
|
|
7.43
|
%
|
|
|
7.45
|
%
|
|
|
7.59
|
%
|
|
|
7.39
|
%
|
|
Average outstanding balance
|
|
$
|
119,117
|
|
|
$
|
123,920
|
|
|
$
|
121,779
|
|
|
$
|
96,181
|
|
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.
|
|
|
September 30, 2020
|
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
|
Unsecured Debt - GECCL Notes
|
|
$
|
30,293
|
|
|
$
|
30,293
|
|
|
$
|
28,463
|
|
|
Unsecured Debt - GECCM Notes
|
|
|
45,610
|
|
|
|
45,610
|
|
|
|
41,159
|
|
|
Unsecured Debt - GECCN Notes
|
|
|
42,823
|
|
|
|
42,823
|
|
|
|
37,873
|
|
|
Total
|
|
$
|
118,726
|
|
|
$
|
118,726
|
|
|
$
|
107,495
|
|
|
|
|
December 31, 2019
|
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
|
Unsecured Debt - GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
32,918
|
|
|
Unsecured Debt - GECCM Notes
|
|
|
46,398
|
|
|
|
46,398
|
|
|
|
46,888
|
|
|
Unsecured Debt - GECCN Notes
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
45,180
|
|
|
Total
|
|
$
|
124,029
|
|
|
$
|
124,029
|
|
|
$
|
124,986
|
|
6. 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 September 30, 2020, the Company had approximately $46,160 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 September 30, 2020 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. The Company has considered the net decreases 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.
F-27
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.
In July 2016, 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 (the “District Court”) 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, 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.
In September 2018, the Company (as successor by merger to Full Circle), the other lenders, and the lender trustee under PEAKS Trust 2009-11 (“PEAKS Trust”), were named as defendants in a claim brought by the Chapter 7 trustee in the ITT Educational Services bankruptcy. Full Circle purchased via assignment a portion of the PEAKS Trust senior secured facility from Deutsche Bank Trust Company Americas in December 2016. The PEAKS Trust senior secured facility was supported by an underlying portfolio of student loans and guaranteed by ITT Educational Services, Inc. (“ITT”). In September 2016, ITT and its affiliates filed for relief under Chapter 7 of the Bankruptcy Code. Following the Chapter 7 filing, a trustee was appointed who initiated a proceeding against certain Deutsche Bank entities and the investors in the PEAKS Trust, including GECC. On November 2, 2018, the trustee filed a motion seeking to stay the litigation in order to facilitate settlement. In September 2020, the Company paid its pro rata share of a settlement with the trustee in an amount of $201. The settlement was approved by the bankruptcy court on October 21, 2020.
7. 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.
F-28
8. FINANCIAL HIGHLIGHTS
Below is the schedule of financial highlights of the Company:
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Per Share Data:(1)
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
8.63
|
|
|
$
|
10.34
|
|
|
Net investment income
|
|
|
0.53
|
|
|
|
0.81
|
|
|
Net realized gains (loss)
|
|
|
(1.02
|
)
|
|
|
0.12
|
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
(1.86
|
)
|
|
|
(1.53
|
)
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(2.35
|
)
|
|
|
(0.60
|
)
|
|
Accretion from share buybacks
|
|
|
-
|
|
|
|
0.10
|
|
|
Distributions declared from net investment income(2)
|
|
|
(0.75
|
)
|
|
|
(0.75
|
)
|
|
Net decrease resulting from distributions to common stockholders
|
|
|
(0.75
|
)
|
|
|
(0.75
|
)
|
|
Net asset value, end of period
|
|
$
|
5.53
|
|
|
$
|
9.09
|
|
|
Per share market value, end of period
|
|
$
|
3.38
|
|
|
$
|
8.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of period
|
|
|
10,941,770
|
|
|
|
10,062,682
|
|
|
Total return based on net asset value(3)
|
|
|
(25.03
|
)%
|
|
|
(5.08
|
)%
|
|
Total return based on market value(3)
|
|
|
(47.85
|
)%
|
|
|
14.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
60,464
|
|
|
$
|
91,489
|
|
|
Ratio of total expenses to average net assets (4),(5)
|
|
|
27.14
|
%
|
|
|
15.29
|
%
|
|
Ratio of incentive fees to average net assets(4)
|
|
|
1.44
|
%
|
|
|
2.76
|
%
|
|
Ratio of net investment income to average net assets(4),(5)
|
|
|
13.53
|
%
|
|
|
11.04
|
%
|
|
Portfolio turnover
|
|
|
51
|
%
|
|
|
72
|
%
|
|
(1)
|
The per share data was derived by using the weighted average shares outstanding during the period, except where such calculations deviate from those specified under the instructions to Form N-2.
|
|
(2)
|
The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.
|
|
(3)
|
Total return based on net asset value is calculated as the change in net asset value per share, assuming the Company’s distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share, assuming the Company’s distributions were reinvested through its dividend reinvestment plan. Total return does not include any estimate of a sales load or commission paid to acquire shares.
|
|
(4)
|
Average net assets used in ratio calculations is calculated using monthly ending net assets for the period presented. For the nine months ended September 30, 2020 and 2019 average net assets were $56,318 and $101,665, respectively.
|
|
(5)
|
Annualized for periods less than one year.
|
9. 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 September 30, 2020 represented 65% 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 September 30, 2020 represented 33% of the Company's net assets.
F-29
Fair value as of September 30, 2020 along with transactions during the nine months ended September 30, 2020 in these affiliated investments and controlled investments was as follows:
|
|
|
For the Nine Months Ended September 30, 2020
|
|
|
Issue(1)
|
|
Fair value at December 31, 2019
|
|
|
Gross Additions(2)
|
|
|
Gross Reductions(3)
|
|
|
Net Realized
Gain (Loss)
|
|
|
Change in Unrealized
Appreciation (Depreciation)
|
|
|
Fair value at September 30, 2020
|
|
|
Interest
Income(4)
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
|
Non-Controlled, Affiliated Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avanti Communications Group PLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.25 Lien, Secured Bond
|
|
$
|
-
|
|
|
$
|
1,113
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,113
|
|
|
$
|
58
|
|
|
$
|
75
|
|
|
$
|
-
|
|
|
1.5 Lien, Secured Bond
|
|
|
8,413
|
|
|
|
812
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
9,225
|
|
|
|
830
|
|
|
|
-
|
|
|
|
-
|
|
|
1.5 Lien, Secured Bond - Unfunded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
2nd Lien, Secured Bond
|
|
|
29,812
|
|
|
|
2,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,782
|
)
|
|
|
27,657
|
|
|
|
3,670
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity (9% of class)
|
|
|
2,353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,014
|
)
|
|
|
1,339
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
40,578
|
|
|
|
4,552
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,796
|
)
|
|
|
39,334
|
|
|
|
4,558
|
|
|
|
75
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Secured Loan
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity (19% of class)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
40,608
|
|
|
$
|
4,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(5,796
|
)
|
|
$
|
39,364
|
|
|
$
|
4,558
|
|
|
$
|
75
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Finance Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Secured Revolver
|
|
$
|
806
|
|
|
$
|
574
|
|
|
$
|
1,281
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
99
|
|
|
$
|
41
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
1st Lien, Secured Revolver - Unfunded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
1st Lien, Secured Term Loan B
|
|
|
244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
244
|
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity (72% of class)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1,050
|
|
|
|
574
|
|
|
|
1,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
343
|
|
|
|
104
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PE Facility Solutions, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Secured Term Loan B
|
|
|
819
|
|
|
|
-
|
|
|
|
674
|
|
|
|
-
|
|
|
|
17
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity (87% of class)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
819
|
|
|
|
-
|
|
|
|
674
|
|
|
|
-
|
|
|
|
17
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prestige Capital Finance, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
-
|
|
|
|
5,094
|
|
|
|
2,264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,830
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivable - Unfunded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivable
|
|
|
-
|
|
|
|
4,270
|
|
|
|
643
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,627
|
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivable - Unfunded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivable
|
|
|
-
|
|
|
|
3,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,063
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivable - Unfunded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity (80% of class)
|
|
|
7,726
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,177
|
|
|
|
9,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,760
|
|
|
|
|
|
7,726
|
|
|
|
12,427
|
|
|
|
2,907
|
|
|
|
-
|
|
|
|
2,177
|
|
|
|
19,423
|
|
|
|
84
|
|
|
|
-
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,595
|
|
|
$
|
13,001
|
|
|
$
|
4,862
|
|
|
$
|
-
|
|
|
$
|
2,194
|
|
|
$
|
19,928
|
|
|
$
|
188
|
|
|
$
|
12
|
|
|
$
|
1,760
|
|
|
(1)
|
Non-unitized equity investments are disclosed with percentage ownership in lieu of quantity.
|
|
(2)
|
Gross additions include increases resulting from new or additional portfolio investments, capitalized PIK income, accretion of discounts and the exchange of one or more existing securities for one or more new securities.
|
|
(3)
|
Gross reductions include decreases resulting from principal collections related to investment repayments or sales and the exchange of one or more existing securities for one or more new securities.
|
|
(4)
|
Income amounts include accrued PIK income.
|
F-30
10. SUBSEQUENT EVENTS
On October 1, 2020, the Company announced the final results of the Company’s non-transferable rights offering, which entitled holders of rights to purchase one new share of common stock for each right held at a subscription price of $2.95 per share. In total, the Company sold 10,761,950 shares of the Company’s common stock for aggregate gross proceeds of approximately $31,747.
The Board set distributions for the quarter ending March 31, 2021 at a rate of $0.10 per quarter. All of the distribution is from net investment income. The schedule of distribution payment will be established by GECC pursuant to authority granted by the Board. The distribution will be paid in cash.
In October 2020:
|
|
•
|
the Company purchased 43,993 preferred shares in Blueknight Energy Partners L.P. (“Blueknight”) for approximately $260.
|
|
|
•
|
the Company purchased $1,000 in par value of Peninsula Pacific Entertainment, LLC (“Peninsula Pacific”) secured bonds at 100% of par value.
|
|
|
•
|
the Company sold $1,000 in par value of Peninsula Pacific secured bonds at approximately 103% of par value.
|
|
|
•
|
the Company purchased $2,000 in par value of Natural Resource Partners, L.P. unsecured bonds at approximately 90% of par value.
|
|
|
•
|
$2,000 of par value of Viasat, Inc. receivable was redeemed at 100% of par value.
|
|
|
•
|
the Company purchased $3,000 in par value of Viasat, Inc. receivable at 90% of par value.
|
|
|
•
|
the Company purchased $1,000 in par value of Cars.com Inc. secured bonds at 100% of par value.
|
|
|
•
|
the Company sold $1,000 in par value of Cars.com, Inc. unsecured bonds at 100% of par value.
|
|
|
•
|
the Company purchased $230 in par value of California Pizza Kitchen, Inc. second lien term loan at approximately 1% of par value.
|
|
|
•
|
the Company purchased $2,000 in par value of Par Petroleum, LLC secured bonds at approximately 81% of par value.
|
In November 2020:
|
|
•
|
the Company purchased 30,000 preferred shares in Blueknight for approximately $176.
|
F-31