Business Context and Reporting Period
Company: Great Elm Capital Corp. (Great Elm)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2016
Status: Development Stage Entity. Great Elm was formed on April 22, 2016, and elected to be treated as a Business Development Company (BDC) on September 27, 2016. The company intends to invest primarily in the debt of middle-market companies and small businesses.
Key Financial Metrics
| Metric | Value (in thousands) |
|---|---|
| Total Assets | $30,000 |
| Cash and Cash Equivalents | $30,000 |
| Total Liabilities | $0 |
| Net Assets | $30,000 |
| Net Asset Value (NAV) Per Share | $15.25 |
| Shares Outstanding | 1,966,667 |
| Revenue | $0 (No investment income generated) |
| Operating Expenses | $0 (No fees accrued as of period end) |
Note: The company held no portfolio investments on the balance sheet as of September 30, 2016. The Initial GECC Portfolio transaction settled on November 1, 2016.
Material Changes and Transactions
- Initial Capitalization: On June 23, 2016, Great Elm Capital Group (GEC) contributed $30.0 million in cash in exchange for 1,966,667 shares of common stock. This is the sole asset reflected on the September 30 balance sheet.
- Pending Portfolio Acquisition: On September 27, 2016, the company agreed to acquire the "Initial GECC Portfolio" from MAST Funds in exchange for 5,935,800 shares. This transaction settled on November 1, 2016, and is not reflected in the September 30 financial statements.
- Merger Agreement: The company entered into a merger agreement with Full Circle Capital Corporation. The merger was completed on November 3, 2016, involving the issuance of approximately 4.99 million shares and a $5.4 million special cash dividend to former Full Circle stockholders.
- Contingent Liabilities: As of September 30, 2016, the company estimated reimbursable transaction costs at $2.9 million. These were not recorded on the balance sheet as the obligation was contingent upon the consummation of the merger.
Outlook, Management Commentary, and Risks
- Investment Strategy: As a BDC, Great Elm intends to invest at least 70% of total assets in "qualifying assets," primarily debt of private U.S. companies. The company expects to generate revenue through interest income, dividends, and capital gains.
- Fee Structure: The Investment Management Agreement with Great Elm Capital Management, Inc. (GECM) provides for a base management fee of 1.5% of average adjusted gross assets and an incentive fee of 20% on net investment income exceeding a 7.0% annualized hurdle rate, subject to a total return requirement.
- Tax Status: The company intends to elect Regulated Investment Company (RIC) status for the fiscal year starting October 1, 2016, to avoid corporate-level taxation on distributed income.
- Legal Proceedings: Several shareholder lawsuits regarding the Full Circle merger were filed in September 2016. On October 24, 2016, the parties reached an agreement in principle to settle these actions, contingent on court approval. The settlement did not affect the merger consideration.
- Risks: Forward-looking statements are subject to risks including credit market liquidity, interest rate fluctuations, and the ability of portfolio companies to meet objectives.
Investor Verification Checklist
- Verify the final valuation of the Initial GECC Portfolio upon settlement (November 1, 2016) and the resulting cost basis under ASC 805.
- Confirm the final share count and NAV per share following the November 3, 2016 merger with Full Circle Capital Corporation.
- Monitor the status of the shareholder lawsuit settlements and ensure no additional liabilities arise from the litigation.
- Review the first quarterly report post-merger to confirm the commencement of management fee accruals and investment income generation.
- Validate the company's compliance with BDC regulatory requirements, specifically the 70% qualifying asset test, once the portfolio is fully integrated.