Business Context and Reporting Period
This Form 8-K, filed on December 22, 2016, by Great Elm Capital Corp. (GECC), reports the closing of a merger with Full Circle Capital Corporation ("Full Circle") on November 3, 2016. The filing provides unaudited pro forma financial information as of June 30, 2016, and actual consolidated financial statements as of November 3, 2016, following the merger and the completion of "Formation Transactions" involving contributions from Great Elm Capital Group and MAST Funds.
Key Financial Metrics
As of November 3, 2016 (Post-Merger Actuals)
- Total Assets: $228,352,000
- Investments at Fair Value: $164,657,000 (Cost: $165,152,000)
- Cash and Cash Equivalents: $59,109,000
- Total Liabilities: $42,605,000
- Notes Payable: $34,574,000 (8.25% due June 30, 2020)
- Net Assets: $185,747,000
- Net Asset Value (NAV) per Share: $14.41
- Shares Outstanding: 12,889,052
Pro Forma Combined (As of June 30, 2016)
- Total Assets: $230,333,296
- Total Investments: $171,122,215
- Cash: $57,981,932
- Total Liabilities: $40,854,238
- Net Assets: $189,479,058
Material Changes and Transactions
- Merger Completion: GECC merged with Full Circle Capital Corporation. Full Circle shareholders received 0.2219 shares of GECC common stock for each share held.
- Special Distribution: Full Circle declared a special distribution of approximately $5.4 million to shareholders immediately prior to the merger effective time.
- Formation Transactions: GECC received $30 million in cash from Great Elm Capital Group and a portfolio of debt instruments valued at approximately $90 million from MAST Funds.
- Debt Adjustment: The pro forma statements reflect an adjustment to the carrying value of Full Circle's debt to market value as of June 30, 2016.
- Transaction Costs: Estimated aggregate transaction costs for GECC, MAST, and Great Elm Capital Group were approximately $2.9 million, recorded as a reduction in net assets.
Outlook, Risks, and Contingencies
- Accounting Adjustments: The pro forma financial statements are preliminary. Final acquisition accounting may differ materially from these estimates, potentially impacting future results of operations and financial position.
- Non-Qualifying Assets: As of June 30, 2016, on a pro forma basis, non-qualifying assets aggregated to $62.5 million, representing 27% of total pro forma assets. Under the Investment Company Act of 1940, qualifying assets must represent at least 70% of total assets.
- Investment Risks: The portfolio includes investments on non-accrual status and securities deemed "restricted" under the Securities Act of 1933, limiting resale. Some investments bear variable interest rates tied to LIBOR.
- Unfunded Commitments: The portfolio includes unfunded revolving loans (e.g., Aptean, Inc.) which may or may not be funded in the future.
Investor Verification Checklist
- Verify the final purchase accounting adjustments and their impact on the Net Asset Value per share compared to the preliminary pro forma figures.
- Confirm the status of the $62.5 million in non-qualifying assets and the company's strategy to maintain the 70% qualifying asset threshold.
- Review the specific terms and credit quality of the $90 million portfolio contributed by MAST Funds, particularly regarding the non-accrual status of certain holdings.
- Monitor the interest rate exposure of the variable-rate debt portfolio given the reliance on LIBOR.
- Assess the liquidity position relative to the $34.6 million in notes payable due in 2020.