m

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 June 30, 2022

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		Nasdaq Global Market
6.50% Notes due 2024		GECCN		Nasdaq Global Market
5.875% Notes due 2026		GECCO		Nasdaq Global Market

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 July 29, 2022, the registrant had 7,601,958 shares of common stock, $0.01 par value per share, outstanding.

 

 

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Table of Contents

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	19
Item 6.	Exhibits	19
	Signatures	20
	Index to Consolidated Financial Statements	F-21
	Consolidated Statements of Assets and Liabilities (unaudited)	F-22
	Consolidated Statements of Operations (unaudited)	F-23
	Consolidated Statements of Changes in Net Assets (unaudited)	F-24
	Consolidated Statements of Cash Flows (unaudited)	F-25
	Consolidated Schedule of Investments (unaudited)	F-27
	Notes to the Unaudited Consolidated Financial Statements	F-51

 

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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, 2021 (our “Form 10-K”).

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”).

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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. The Investment Management Agreement renews for successive annual periods, subject to requisite Board and/or stockholder approvals. 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 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.

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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 of directors (our “Board”). Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. 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.

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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.

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.

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Portfolio and Investment Activity

The following is a summary of our investment activity for the year ended December 31, 2021 and the six months ended June 30, 2022:

(in thousands)		Acquisitions(1)				Dispositions(2)				Weighted Average Yield End of Period(3)
Quarter ended March 31, 2021		$	58,429			$	(28,268	)			10.91	%
Quarter ended June 30, 2021			49,904				(35,583	)			11.10	%
Quarter ended September 30, 2021			72,340				(31,640	)			11.27	%
Quarter ended December 31, 2021			34,184				(40,270	)			10.81	%
For the Year Ended December 31, 2021			214,857				(135,761	)
Quarter ended March 31, 2022			27,578				(29,723	)			10.38	%
Quarter ended June 30, 2022			44,750				(34,014	)			10.27	%
For the Six Months Ended June 30, 2022		$	72,328			$	(63,737	)

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the six months ended June 30, 2022 and the year ended December 31, 2021. Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, are excluded from the table below.

(in thousands)		For the Six Months Ended June 30, 2022				For the Year Ended December 31, 2021
Beginning Investment Portfolio, at fair value		$	212,149			$	151,648
Portfolio Investments acquired(1)			72,328				214,857
Amortization of premium and accretion of discount, net			612				3,958
Portfolio Investments repaid or sold(2)			(63,737	)			(135,761	)
Net change in unrealized appreciation (depreciation) on investments			112,937				(12,922	)
Net realized gain (loss) on investments			(129,687	)			(9,631	)
Ending Investment Portfolio, at fair value		$	204,602			$	212,149

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Portfolio Classification

The following table shows the fair value of our portfolio of investments by industry as of June 30, 2022 and December 31, 2021 (in thousands):

		June 30, 2022								December 31, 2021
Industry		Investments at Fair Value				Percentage of Fair Value				Investments at Fair Value				Percentage of Fair Value
Specialty Finance		$	58,009				28.35	%		$	47,952				22.60	%
Energy Midstream			31,423				15.36	%			31,815				15.00	%
Chemicals			20,113				9.83	%			15,058				7.10	%
Metals & Mining			13,674				6.68	%			13,711				6.46	%
Internet Media			13,550				6.62	%			11,870				5.60	%
Oil & Gas Exploration & Production			11,434				5.59	%			9,849				4.64	%
Industrial			8,588				4.20	%			7,551				3.56	%
Transportation Equipment Manufacturing			7,721				3.77	%			6,030				2.84	%
Casinos & Gaming			6,928				3.39	%			5,291				2.49	%
Oil & Gas Refining			5,475				2.68	%			3,030				1.43	%
Hospitality			4,913				2.40	%			4,085				1.93	%
Food & Staples			4,264				2.08	%			2,724				1.28	%
Wireless Telecommunications Services			3,735				1.83	%			8,137				3.84	%
Aircraft			3,569				1.75	%			-				-	%
Restaurants			3,363				1.64	%			8,310				3.92	%
Energy Services			2,899				1.42	%			-				-	%
Apparel			2,743				1.34	%			2,929				1.38	%
Technology			1,191				0.58	%			(158	)			(0.07	)%
Diversified Financial			960				0.47	%			-				-	%
Special Purpose Acquisition Company			34				0.02	%			3,044				1.43	%
IT Services			3				-	%			7				0.01	%
Biotechnology			3				-	%			11				0.01	%
Auto Manufacturer			3				-	%			-				-	%
Communications Equipment			2				-	%			1,057				0.50	%
Retail			2				-	%			4,267				2.01	%
Household & Personal Products			2				-	%			-				-	%
Consumer Finance			1				-	%			-				-	%
Construction Materials Manufacturing			-				-	%			10,461				4.93	%
Home Security			-				-	%			5,590				2.63	%
Healthcare Supplies			-				-	%			2,869				1.35	%
Consumer Services			-				-	%			2,640				1.24	%
Commercial Printing			-				-	%			2,025				0.95	%
Software Services			-				-	%			1,994				0.94	%
Total		$	204,602				100.00	%		$	212,149				100.00	%

 

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Results of Operations

This “—Results of Operations” discussion should be read in conjunction with the discussion of (“COVID-19”) under “—Recent Developments—COVID 19”.

Investment Income

		For the Three Months Ended June 30,																For the Six Months Ended June 30,
		2022								2021								2022								2021
		In Thousands				Per Share(1)				In Thousands				Per Share(2)				In Thousands				Per Share(1)				In Thousands				Per Share(2)
Total Investment Income		$	5,513			$	1.06			$	6,233			$	1.59			$	11,071			$	2.27			$	11,528			$	2.95
Interest income			3,734				0.72				5,092				1.30				7,775				1.59				9,271				2.37
Dividend income			1,389				0.27				1,093				0.28				2,656				0.54				1,894				0.48
Other income			390				0.08				48				0.01				640				0.13				363				0.09

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 has decreased primarily due to our positions in Avanti Communications Group plc (“Avanti”) which were put on non-accrual status. This resulted in us recognizing only $0.1 million in aggregate interest income for the six months ended June 30, 2022 as compared to $3.5 million in aggregate interest income during the six months ended June 30, 2021. This decrease has been partially offset by interest earned on new positions.
 

Dividend income for the three and six months ended June 30, 2022 increased as compared to the corresponding period in the prior year due to a higher current quarter distribution from our investments in specialty finance portfolio companies.
 

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Expenses

		For the Three Months Ended June 30,																For the Six Months Ended June 30,
		2022								2021								2022								2021
		In Thousands				Per Share(1)				In Thousands				Per Share(2)				In Thousands				Per Share(1)				In Thousands				Per Share(2)
Total Expenses		$	4,325			$	0.83			$	4,130			$	1.05			$	3,828			$	0.78			$	7,921			$	2.03
Management fees			771				0.15				765				0.20				1,551				0.32				1,425				0.36
Incentive fees			-				-				398				0.10				-				-				506				0.13
Incentive fee waiver			-				-				-				-				(4,854	)			(0.99	)			-				-
Total advisory and management fees			771			$	0.15				1,163			$	0.30				(3,303	)		$	(0.68	)			1,931			$	0.49
Administration fees			262				0.05				180				0.05				483				0.10				336				0.09
Directors’ fees			44				0.01				56				0.01				107				0.02				111				0.03
Interest expense			2,667				0.51				2,291				0.58				5,337				1.09				4,489				1.15
Professional services			373				0.07				251				0.06				791				0.16				676				0.17
Custody fees			14				-				13				-				28				0.01				26				-
Other			194				0.04				176				0.04				385				0.08				352				0.09
Income Tax Expense
Excise tax			-				-				-				-				101				0.02				-				-

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.

GECM has 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 NAV in such period (subject to any offsetting additional expenses or losses). The incentive fee waiver is not subject to recapture.
 

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.

Administration fees increased in the three and six months ended June 30, 2022 as compared to the corresponding period in the prior year due to increases in allocable personnel time as a result of changes in staffing. Professional services costs for the three and six months ended June 30, 2022 increased as compared to the three and six months ended June 30, 2021, primarily due to increases in third-party valuation services and an increase in other professional fees incurred in oversight and diligence of the specialty finance portfolio investments.

For the three and six months ended June 30, 2022, interest expense increased as compared to the corresponding period in the prior year as a result of the issuance of $57.5 million in aggregate principal amount of the GECCO Notes (as defined below) in June and July 2021, which was partially offset by the redemption of $30.3 million in aggregate principal amount of the 6.50% Notes due 2022 (the “GECCL Notes”) in July 2021.

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Realized Gains (Losses)

		For the Three Months Ended June 30,																For the Six Months Ended June 30,
		2022								2021								2022								2021
		In Thousands				Per Share(1)				In Thousands				Per Share(2)				In Thousands				Per Share(1)				In Thousands				Per Share(2)
Net Realized Gain (Loss)		$	(109,751	)		$	(21.13	)		$	(2,369	)		$	(0.61	)		$	(129,684	)		$	(26.58	)		$	(5,644	)		$	(1.44	)
Gross realized gain			1,678				0.32				3,708				0.95				2,470				0.51				4,579				1.17
Gross realized loss			(111,429	)			(21.45	)			(6,077	)			(1.55	)			(132,153	)			(27.09	)			(10,223	)			(2.62	)

During the three months ended June 30, 2022, net realized losses were primarily driven by the restructuring of our investment in Avanti which included the write off of our investments in the Avanti second lien bonds, 1.5 lien loan and common equity resulting in realization of $110 million in previously recognized unrealized losses. Gross realized gains include $0.9 million and $0.6 million realized on the refinancing of our investment in Tensar Corporation 2nd lien secured loan and the sale of the GAC Holdco Inc. warrants, respectively.

During the six months ended June 30, 2022, gross realized losses included the losses recognized as a result of the Avanti restructuring discussed above along with additional losses of $15.9 million and $4.2 million recognized on the sale of our positions in Tru (UK) Asia Limited (“Tru Taj”) common stock and California Pizza Kitchen, Inc. (“CPK”) common stock, respectively.

During the three months ended June 30, 2021, net realized losses were primarily driven by the paydown of our investment in OPS Acquisitions Limited and Ocean Protection Services Limited (“OPS”) 1st lien secured loan, for which we recognized a realized loss of $4.1 million as a result of receiving a portion of the final expected payout at a rate significantly below par. In addition, we recognized realized losses of $1.6 million and $0.4 million on sales of our investments in CPK common stock and Tru Taj common stock, respectively. These realized losses were partially offset by realized gains of $2.3 million on our sale of Crestwood Equity Partners, LP preferred stock and $1.2 million on the termination of our investment in the Subcom, LLC (“Subcom”) 1st lien secured revolver.

In addition to the above items, during the six months ended June 30, 2021, net realized losses were primarily driven by the sale of our investment in Boardriders, Inc. (“Boardriders”) 1st lien secured loan for which we recognized a realized loss of $3.0 million. This realized loss was partially offset by realized gains of $0.3 million on proceeds received from our former investment in PR Wireless, Inc., $0.2 million on the early paydown of our investments in First Brands, Inc. 1st lien secured loan, $0.1 million in proceeds received from our investment in PE Facility Solutions, LLC common equity.

Change in Unrealized Appreciation (Depreciation) on Investments

		For the Three Months Ended June 30,																For the Six Months Ended June 30,
		2022								2021								2022								2021
		In Thousands				Per Share(1)				In Thousands				Per Share(2)				In Thousands				Per Share(1)				In Thousands				Per Share(2)
Net change in unrealized appreciation/ (depreciation)		$	104,045			$	20.03			$	2,753			$	0.71			$	112,915			$	23.15			$	17,070			$	4.37
Unrealized appreciation			112,487				21.65				13,851				3.54				123,327				25.28				25,901				6.63
Unrealized depreciation			(8,442	)			(1.63	)			(11,098	)			(2.83	)			(10,413	)			(2.13	)			(8,831	)			(2.26	)

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Net unrealized appreciation for the three months ended June 30, 2022 is primarily due to the realization of previously recognized unrealized losses on our investments in the Avanti 2nd lien bonds, 1.5 lien notes and common equity as discussed under Realized Gains (Losses) above, resulting in the reversal of approximately $110 million in previously recognized unrealized depreciation. For the six months ended June 30, 2022, unrealized appreciation also includes approximately $15.3 million and $4.2 million in reversals of previously recognized unrealized depreciation as a result of the sales of our investments in Tru Taj common equity and CPK common equity. Unrealized depreciation for the three and six months ended June 30, 2022 also includes approximately $6.8 million of loss on our investments in Avanti Space Limited E2, F and G junior priority notes.

During the three months ended June 30, 2021, unrealized appreciation was largely driven by the paydown of our investment in OPS and sale of our investment in CPK common stock, discussed under Realized Gains (Losses) above, for which we relieved $4.1 million and $2.3 million of previously recognized unrealized losses, respectively. In addition, we recognized $2.8 million in unrealized gain on the remaining shares of CPK common stock still held and $0.8 million in unrealized gain on our investment in Prestige common stock as a result of increases in fair value as of June 30, 2021 as compared to March 31, 2021. During the three months ended June 30, 2021, net unrealized appreciation included a $6.1 million loss on our investment in Avanti 2nd lien secured bonds and a $1.6 million loss on our investment in PFS Holding Corporation (“PFS”) common stock, both as a result of decreases in fair value.

In addition to the items noted for the quarter ended June 30, 2021, unrealized appreciation for the six months ended June 30, 2021 includes $3.5 million and $1.5 million in increase in the fair value of our investments in Tru Taj common stock and Crestwood preferred equity, respectively. Unrealized depreciation for the six months ended June 30, 2021, includes decreases in fair value of $3.8 million and $1.8 million on our investments in PFS common stock and Avanti 2nd lien secured bonds, respectively. In addition, we recognized unrealized loss of $1.2 million on our investment in Subcom 1st lien secured revolver due to the termination of the revolver and reversal of previously recognized unrealized gains, as noted under the discussion of realized gains above.

Liquidity and Capital Resources

This “—Liquidity and Capital Resources” discussion should be read in conjunction with the discussion of COVID-19 under “—Recent Developments—COVID 19”.

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 June 30, 2022, we had approximately $1.7 million of cash and cash equivalents and approximately $32.4 million of money market fund investments at fair value. At June 30, 2022, we had investments in 47 debt instruments across 41 companies, totaling approximately $153.4 million at fair value and 114 equity investments in 114 companies, totaling approximately $51.2 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 June 30, 2022, we had approximately $20.0 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 June 30, 2022 balance sheet to satisfy the unfunded commitments.

For the six months ended June 30, 2022, net cash used in operating activities was approximately $37.5 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 used in purchases and proceeds from sales of investments was approximately $39.0 million, reflecting payments for additional investments of $99.7 million, offset by proceeds from principal repayments and sales of $60.7 million. Such amounts include draws and repayments on revolving credit facilities.

For the six months ended June 30, 2022, net cash provided by financing activities was $30.1 million, consisting of $36.2 million in proceeds from the rights offering, net of related expenses, offset by approximately $6.2 million in distributions to stockholders.

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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 June 30, 2022 is as follows:

(in thousands)		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Contractual Obligations
GECCM Notes			45,610				-				45,610				-				-
GECCN Notes			42,823				-				42,823				-				-
GECCO Notes			57,500				-				-				57,500				-
Total		$	145,933			$	-			$	88,433			$	57,500			$	-

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.

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 June 30, 2022, there were no borrowings outstanding under the revolving line.

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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 June 30, 2022 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 June 30, 2022 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 June 30, 2022 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 June 30, 2022, our asset coverage ratio was approximately 166.9%. Under the Investment Company Act, we are subject to a minimum asset coverage ratio of 150%.

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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 59.9% premium to NAV and as low as a 51.0% 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)		to NAV(2)		Declared(3)
Fiscal year ending December 31, 2022
Third Quarter (through July 29, 2022)		N/A				$	12.70			$	12.27			--		--		$	0.45
Second Quarter		$	12.84				15.00				12.30			16.9%