UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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(Mark One) | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
OR
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-00809
Full Circle Capital Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND | | 27-2411476 |
(State or jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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102 Greenwich Avenue, 2nd Floor Greenwich, CT | | 06830 |
(Address of principal executive office) | | (Zip Code) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 900-2100
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 periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filero | | Accelerated filero |
Non-accelerated filerþ (Do not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yeso Noþ
The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of November 9, 2015 was 22,472,243.
TABLE OF CONTENTS
TABLE OF CONTENTS
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| | Page |
PART I. FINANCIAL INFORMATION
| | | | |
Item 1. Financial Statements | | | 1 | |
Consolidated Statements of Assets and Liabilities as of September 30, 2015 (unaudited) and June 30, 2015 | | | 1 | |
Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2015 and September 30, 2014 | | | 2 | |
Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended September 30, 2015 and September 30, 2014 | | | 3 | |
Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2015 and September 30, 2014 | | | 4 | |
Consolidated Schedule of Investments (unaudited) as of September 30, 2015 | | | 5 | |
Consolidated Schedule of Investments as of June 30, 2015 | | | 11 | |
Notes to Consolidated Financial Statements (unaudited) as of September 30, 2015 | | | 17 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 44 | |
Forward-Looking Statements | | | 44 | |
Overview | | | 45 | |
Critical Accounting Policies | | | 47 | |
Current Market Conditions and Market Opportunity | | | 51 | |
Operating Expense Reimbursement | | | 51 | |
Management Fee and Incentive Fee Waiver | | | 52 | |
Portfolio Composition and Investment Activity | | | 52 | |
Results of Operations | | | 56 | |
Liquidity and Capital Resources | | | 59 | |
Recent Developments | | | 63 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | | | 63 | |
Item 4 Controls and Procedures | | | 64 | |
PART II. OTHER INFORMATION
| | | | |
Item 1. Legal Proceedings | | | 65 | |
Item 1A. Risk Factors | | | 65 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | 65 | |
Item 3. Defaults Upon Senior Securities | | | 65 | |
Item 4. Mine Safety Disclosures | | | 65 | |
Item 5. Other Information | | | 65 | |
Item 6. Exhibits | | | 66 | |
SIGNATURES | | | 68 | |
i
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
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| | | | September 30, 2015 | | June 30, 2015 |
| | | | (Unaudited) |
Assets
| | | | | | | | | | | | |
Control Investments at Fair Value (Cost of $11,362,184 and $11,409,596, respectively) | | | | | | $ | 5,690,168 | | | $ | 5,812,064 | |
Affiliate Investments at Fair Value (Cost of $25,143,972 and $24,434,726, respectively) | | | | | | | 13,518,980 | | | | 16,019,272 | |
Non-Control/Non-Affiliate Investments at Fair Value (Cost of $133,318,235 and $136,351,581, respectively) | | | | | | | 122,847,266 | | | | 130,282,423 | |
Total Investments at Fair Value (Cost of $169,824,391 and $172,195,903, respectively) | | | (NOTE 9 | ) | | | 142,056,414 | | | | 152,113,759 | |
Open Swap Contract, at Fair Value | | | (NOTE 10 | ) | | | 225,000 | | | | — | |
Cash | | | | | | | 130,428 | | | | 3,736,563 | |
Interest Receivable | | | | | | | 1,783,402 | | | | 1,903,606 | |
Principal Receivable | | | | | | | 122,008 | | | | 23,287 | |
Distributions Receivable | | | | | | | 20,647 | | | | 15,141 | |
Due from Affiliates | | | | | | | 541,854 | | | | 605,749 | |
Due from Portfolio Investments | | | | | | | 69,532 | | | | 180,300 | |
Receivable on Open Swap Contract | | | | | | | 32,238 | | | | 1,081 | |
Prepaid Expenses | | | | | | | 274,058 | | | | 66,105 | |
Other Assets | | | | | | | — | | | | 1,483,578 | |
Deferred Offering Expenses | | | | | | | 367,820 | | | | 328,168 | |
Deferred Credit Facility Fees | | | (NOTE 8 | ) | | | 195,040 | | | | 267,645 | |
Total Assets | | | | | | | 145,818,441 | | | | 160,724,982 | |
Liabilities
| | | | | | | | | | | | |
Due to Affiliates | | | (NOTE 5 | ) | | | 1,115,588 | | | | 1,052,489 | |
Accrued Liabilities | | | | | | | 49,632 | | | | 179,378 | |
Deposit from Swap Counterparty | | | | | | | 10,200,000 | | | | 10,380,000 | |
Payable for Investments Acquired | | | | | | | — | | | | 15,020,000 | |
Distributions Payable | | | | | | | 797,736 | | | | 813,240 | |
Interest Payable | | | | | | | 47,960 | | | | 57,605 | |
Other Liabilities | | | | | | | 466,683 | | | | 305,957 | |
Accrued Offering Expenses | | | | | | | 1,212 | | | | 7,258 | |
Line of Credit | | | (NOTE 8 | ) | | | 9,033,258 | | | | — | |
Notes Payable 8.25% due June 30, 2020 (plus unamortized premium of $152,721 and $158,504 and less deferred debt issuance costs of $793,700 and $833,541, respectively) | | | (NOTE 8 | ) | | | 33,004,546 | | | | 32,970,488 | |
Total Liabilities | | | | | | | 54,716,615 | | | | 60,786,415 | |
Commitments and contingencies | | | (NOTE 12 | ) | | | — | | | | — | |
Net Assets | | | | | | $ | 91,101,826 | | | $ | 99,938,567 | |
Components of Net Assets
| | | | | | | | | | | | |
Common Stock, par value $0.01 per share (100,000,000 authorized; 22,763,023 and 23,235,430 issued and outstanding, respectively) | | | | | | $ | 227,630 | | | $ | 232,354 | |
Paid-in Capital in Excess of Par | | | | | | | 130,986,972 | | | | 132,487,067 | |
Distributions in Excess of Net Investment Income | | | | | | | (119,318 | ) | | | (119,318 | ) |
Accumulated Net Realized Losses | | | | | | | (12,450,481 | ) | | | (12,579,392 | ) |
Accumulated Net Unrealized Losses | | | | | | | (27,542,977 | ) | | | (20,082,144 | ) |
Net Assets | | | | | | $ | 91,101,826 | | | $ | 99,938,567 | |
Net Asset Value Per Share | | | | | | $ | 4.00 | | | $ | 4.30 | |
See notes to consolidated financial statements.
1
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| | | | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
Investment Income
| | | | | | | | | | | | |
Interest Income from Non-Control/Non-Affiliate Investments | | | | | | $ | 3,411,254 | | | $ | 2,807,931 | |
Interest Income from Affiliate Investments | | | | | | | 614,458 | | | | 540,560 | |
Interest Income from Control Investments | | | | | | | 168,781 | | | | 529,108 | |
Dividend Income from Control Investments | | | | | | | 20,647 | | | | — | |
Other Income from Non-Control/Non-Affiliate Investments | | | | | | | 496,519 | | | | 176,006 | |
Other Income from Affiliate Investments | | | | | | | 1,781 | | | | 9,470 | |
Other Income from Control Investments | | | | | | | 12,500 | | | | 12,500 | |
Other Income from Non-Investment Sources | | | (NOTE 5 | ) | | | 14,682 | | | | 11,049 | |
Total Investment Income | | | | | | | 4,740,622 | | | | 4,086,624 | |
Operating Expenses
| | | | | | | | | | | | |
Management Fee | | | | | | | 611,929 | | | | 572,558 | |
Incentive Fee | | | | | | | 481,777 | | | | 389,850 | |
Total Advisory Fees | | | (NOTE 5 | ) | | | 1,093,706 | | | | 962,408 | |
Allocation of Overhead Expenses | | | | | | | 47,138 | | | | 36,555 | |
Sub-Administration Fees | | | | | | | 71,838 | | | | 63,209 | |
Officers’ Compensation | | | | | | | 76,306 | | | | 75,913 | |
Total Costs Incurred Under Administration Agreement | | | (NOTE 5 | ) | | | 195,282 | | | | 175,677 | |
Directors’ Fees | | | | | | | 45,750 | | | | 47,946 | |
Interest Expenses | | | (NOTE 8 | ) | | | 1,003,829 | | | | 1,002,383 | |
Professional Services Expense | | | | | | | 339,552 | | | | 219,668 | |
Bank Fees | | | | | | | 8,741 | | | | 10,271 | |
Other | | | | | | | 126,655 | | | | 108,871 | |
Total Gross Operating Expenses | | | | | | | 2,813,515 | | | | 2,527,224 | |
Management Fee Waiver and Expense Reimbursement | | | (NOTE 5 | ) | | | (497,109 | ) | | | (282,674 | ) |
Total Net Operating Expenses | | | | | | | 2,316,406 | | | | 2,244,550 | |
Net Investment Income | | | | | | | 2,424,216 | | | | 1,842,074 | |
Net Change in Unrealized Gain (Loss) on:
| | | | | | | | | | | | |
Investments | | | | | | | (7,685,833 | ) | | | (2,015,035 | ) |
Open Swap Contract | | | | | | | 225,000 | | | | — | |
Net Change in Unrealized Gain (Loss) | | | | | | | (7,460,833 | ) | | | (2,015,035 | ) |
Net Realized Gain (Loss) on:
| | | | | | | | | | | | |
Non-Control/Non-Affiliate Investments | | | | | | | 82,361 | | | | 402,907 | |
Control Investments | | | | | | | (53,106 | ) | | | — | |
Open Swap Contract | | | | | | | 99,656 | | | | — | |
Foreign Currency Transactions | | | | | | | — | | | | (1,248 | ) |
Net Realized Gain (Loss) | | | | | | | 128,911 | | | | 401,659 | |
Net Increase (Decrease) in Net Assets Resulting from Operations | | | | | | $ | (4,907,706 | ) | | $ | 228,698 | |
Earnings (Loss) per Common Share Basic and Diluted | | | (NOTE 4 | ) | | $ | (0.21 | ) | | $ | 0.02 | |
Net Investment Income per Common Share Basic and Diluted | | | | | | $ | 0.11 | | | $ | 0.16 | |
Weighted Average Shares of Common Stock Outstanding Basic and Diluted | | | | | | | 23,175,342 | | | | 11,877,534 | |
See notes to consolidated financial statements.
2
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
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| | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
Increase (Decrease) in Net Assets Resulting from Operations:
| | | | | | | | |
Net Investment Income | | $ | 2,424,216 | | | $ | 1,842,074 | |
Net Change in Unrealized Gain (Loss) on Investments and Open Swap Contract | | | (7,460,833 | ) | | | (2,015,035 | ) |
Net Realized Gain (Loss) on:
| | | | | | | | |
Investments and Open Swap Contract | | | 128,911 | | | | 402,907 | |
Foreign Currency Transactions | | | — | | | | (1,248 | ) |
Net Realized Gain (Loss) | | | 128,911 | | | | 401,659 | |
Net Increase (Decrease) in Net Assets Resulting from Operations | | | (4,907,706 | ) | | | 228,698 | |
Dividends from Net Investment Income | | | (2,424,216 | ) | | | (1,842,074 | ) |
Distributions from Other Sources | | | — | | | | (559,682 | ) |
Net Decrease in Net Assets Resulting from Distributions | | | (2,424,216 | ) | | | (2,401,756 | ) |
Capital Share Transactions:
| | | | | | | | |
Repurchase of Common Stock Under Share Repurchase Program | | | (1,504,819 | ) | | | — | |
Issuance of Common Stock | | | — | | | | 3,744,400 | |
Less Offering Costs and Underwriting Fees | | | — | | | | (14,246 | ) |
Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions | | | (1,504,819 | ) | | | 3,730,154 | |
Total Increase (Decrease) in Net Assets | | | (8,836,741 | ) | | | 1,557,096 | |
Net Assets at Beginning of Period | | | 99,938,567 | | | | 72,980,277 | |
Net Assets at End of Period | | $ | 91,101,826 | | | $ | 74,537,373 | |
Capital Share Activity:
| | | | | | | | |
Shares Repurchased Under Share Repurchase Program | | | (472,407 | ) | | | — | |
Shares Issued | | | — | | | | 506,000 | |
Shares Outstanding at Beginning of Period | | | 23,235,430 | | | | 11,443,034 | |
Shares Outstanding at End of Period | | | 22,763,023 | | | | 11,949,034 | |
See notes to consolidated financial statements.
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
Cash Flows from Operating Activities:
| | | | | | | | |
Net Increase (Decrease) in Net Assets Resulting from Operations | | $ | (4,907,706 | ) | | $ | 228,698 | |
Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash Provided by (Used in) Operating Activities
| | | | | | | | |
Purchases of Investments | | | (29,721,403 | ) | | | (36,370,527 | ) |
Increase in Investments Due to PIK | | | (44,520 | ) | | | (101,614 | ) |
Proceeds from Sale or Refinancing of Investments and Open Swap Contract | | | 32,716,709 | | | | 53,691,798 | |
Net Realized (Gain) Loss on:
| | | | | | | | |
Investments and Open Swap Contract | | | (128,911 | ) | | | (402,907 | ) |
Foreign Currency Transactions | | | — | | | | 1,248 | |
Net Change in Unrealized (Gain) Loss on Investments and Open Swap Contract | | | 7,460,833 | | | | 2,015,035 | |
Amortization and Accretion of Fixed Income Premiums and Discounts | | | (450,363 | ) | | | (171,676 | ) |
Amortization and Accretion of Deferred Debt Issuance Premiums and Costs | | | 34,058 | | | | 33,043 | |
Amortization of Deferred Credit Facility Fees | | | 72,605 | | | | 59,576 | |
Change in Operating Assets and Liabilities
| | | | | | | | |
Deposit with Broker | | | — | | | | 2,525,000 | |
Interest Receivable | | | 120,204 | | | | (376,516 | ) |
Principal Receivable | | | (98,721 | ) | | | (62,747 | ) |
Distributions Receivable | | | (5,506 | ) | | | — | |
Due from Affiliates | | | 63,895 | | | | (332,412 | ) |
Due from Portfolio Investments | | | 110,768 | | | | (753 | ) |
Receivable on Open Swap Contract | | | (31,157 | ) | | | | |
Receivable for Investments Sold | | | — | | | | (12,399,828 | ) |
Prepaid Expenses | | | (207,953 | ) | | | (125,184 | ) |
Other Assets | | | 1,483,578 | | | | 11,875 | |
Due to Affiliates | | | 63,099 | | | | 78,201 | |
Accrued Liabilities | | | (129,746 | ) | | | (92,932 | ) |
Deposit from Swap Counterparty | | | (180,000 | ) | | | — | |
Due to Broker | | | — | | | | (25,000,221 | ) |
Payable for Investments Acquired | | | (15,020,000 | ) | | | (24,900,172 | ) |
Interest Payable | | | (9,645 | ) | | | 48,531 | |
Other Liabilities | | | 160,726 | | | | (2,070 | ) |
Net Cash Provided by (Used in) Operating Activities | | | (8,649,156 | ) | | | (41,646,554 | ) |
Cash Flows from Financing Activities:
| | | | | | | | |
Bank Overdraft | | | — | | | | (821,316 | ) |
Borrowings Under Credit Facility | | | 64,775,390 | | | | 99,833,036 | |
Payments Under Credit Facility | | | (55,742,132 | ) | | | (71,203,476 | ) |
Distributions Paid to Shareholders | | | (2,439,720 | ) | | | (2,367,854 | ) |
Deferred Credit Facility Fees | | | — | | | | (87,765 | ) |
Payment of Offering Expenses and Underwriting Fees | | | (45,698 | ) | | | (64,327 | ) |
Proceeds from Notes Payable | | | — | | | | 12,687,500 | |
Proceeds from Issuance of Common Stock | | | — | | | | 3,744,400 | |
Payment for Repurchase of Common Stock Under Share Repurchase Program | | | (1,504,819 | ) | | | — | |
Net Cash Provided by (Used in) Financing Activities | | | 5,043,021 | | | | 41,720,198 | |
Total Increase (Decrease) in Cash | | | (3,606,135 | ) | | | 73,644 | |
Cash Balance at Beginning of Period | | | 3,736,563 | | | | — | |
Cash Balance at End of Period | | $ | 130,428 | | | $ | 73,644 | |
Supplemental Disclosures of Non-Cash Financing Activities:
| | | | | | | | |
Distributions Declared, Not Yet Paid | | $ | 797,736 | | | $ | 800,585 | |
Accrued Offering Expenses | | $ | 1,212 | | | $ | 33,328 | |
Supplemental Disclosure of Cash Flow Information:
| | | | | | | | |
Cash Paid During the Period for Interest | | $ | 906,811 | | | $ | 861,233 | |
See notes to consolidated financial statements.
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited)
September 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Control Investments(3)
| | | | | | | | | | | | | | | | | | | | |
Takoda Resources Inc.* Geophysical Surveying and Mapping Services | | | Senior Secured Term Loan, 16.00%, 4/1/2016(9)
| | | $ | 2,986,718 | | | $ | 2,986,718 | | | $ | 79,468 | | | | 0.09 | % |
| | | Common Stockˆ,(5) | | | | 749 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 2,986,718 | | | | 79,468 | | | | 0.09 | % |
Texas Westchester Financial, LLC Consumer Financing | | | Limited Liability Company Interestsˆ | | | | 9,278 | | | | 408,606 | | | | 147,500 | | | | 0.16 | % |
The Finance Company, LLC Consumer Financing | | | Senior Secured Term Loan, 15.00% (one month LIBOR plus 14.25%, 15.00% floor), 9/30/2016 | | | $ | 4,195,915 | | | | 4,195,915 | | | | 4,115,773 | | | | 4.52 | % |
| | | Limited Liability Company Interests | | | | 50 | | | | 140,414 | | | | 802,027 | | | | 0.88 | % |
| | | | | | | | | | | 4,336,329 | | | | 4,917,800 | | | | 5.40 | % |
TransAmerican Asset Servicing Group, LLC Asset Recovery Services | | | Senior Secured Revolving Loan, 12.00%, 7/25/2016(9)
| | | $ | 3,658,818 | | | | 3,630,531 | | | | 545,400 | | | | 0.60 | % |
| | | Limited Liability Company Interestsˆ,(6) | | | | 75 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 3,630,531 | | | | 545,400 | | | | 0.60 | % |
Total Control Investments | | | | | | | | | | | 11,362,184 | | | | 5,690,168 | | | | 6.25 | % |
Affiliate Investments(4)
| | | | | | | | | | | | | | | | | | | | |
Modular Process Control, LLC Energy Efficiency Services | | | Senior Secured Revolving Loan, 14.50% (one month LIBOR plus 13.50%, 14.50% floor), 3/28/2017(9)
| | | $ | 1,394,313 | | | | 1,391,094 | | | | 697,480 | | | | 0.77 | % |
| | | Senior Secured Term Loan, 15.50% (one month LIBOR plus 14.50%, 15.50% floor), 3/28/2017(9)
| | | $ | 4,900,000 | | | | 4,759,936 | | | | — | | | | — | % |
| | | Senior Secured Term Loan – Tranche 2, 18.00% (one month LIBOR plus 17.00%, 18.00% floor), 3/28/2017(9),**
| | | $ | 997,664 | | | | 997,664 | | | | — | | | | — | % |
| | | Warrant for 14.50% of the outstanding Class B LLC Interests (at a $0.01 strike price), expires 3/28/2023ˆ | | | | 1 | | | | 288,000 | | | | — | | | | — | % |
| | | | | | | | | | | 7,436,694 | | | | 697,480 | | | | 0.77 | % |
ProGrade Ammo Group, LLC Munitions | | | Senior Secured Revolving Loan, 9.20% (one month LIBOR plus 9.00%, 9.20% floor), 3/30/2016(9),ˆ | | | $ | 1,867,414 | | | | 1,867,414 | | | | 1,867,414 | | | | 2.05 | % |
| | | Senior Secured Term Loan, 16.20% (one month LIBOR plus 16.00%, 16.20% floor), 3/30/2016(9).ˆ | | | $ | 4,843,750 | | | | 4,843,750 | | | | 295,794 | | | | 0.32 | % |
| | | Warrants for 19.9% of the outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018ˆ | | | | 181,240 | | | | 176,770 | | | | — | | | | — | % |
| | | | | | | | | | | 6,887,934 | | | | 2,163,208 | | | | 2.37 | % |
SOLEX Fine Foods, LLC; Catsmo, LLC Food Distributors and Wholesalers | | | Senior Secured Term Loan, 12.34% (one month LIBOR plus 12.14%), 12/28/2016 | | | $ | 3,861,696 | | | | 3,821,217 | | | | 3,803,385 | | | | 4.17 | % |
| | | Limited Liability Company Interestsˆ,(7) | | | | 1 | | | | 290,284 | | | | — | | | | — | % |
| | | Warrants for 1.6% of the outstanding LLC interests (strike price $0.01), expire 12/31/2022ˆ,(7) | | | | 1 | | | | 58,055 | | | | — | | | | — | % |
| | | | | | | | | | | 4,169,556 | | | | 3,803,385 | | | | 4.17 | % |
See notes to consolidated financial statements.
5
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
September 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Affiliate Investments (continued)
| | | | | | | | | | | | | | | | | | | | |
US Oilfield Company, LLC Oil and Gas Field Services | | | Senior Secured Revolving Loan, 12.70% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 735,601 | | | $ | 735,601 | | | $ | 735,601 | | | | 0.81 | % |
| | | Senior Secured Term Loan A, 12.70% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 854,167 | | | | 847,680 | | | | 605,034 | | | | 0.66 | % |
| | | Senior Secured Term Loan B, 12.70% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 4,678,972 | | | | 4,636,007 | | | | 3,314,272 | | | | 3.64 | % |
| | | Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024ˆ | | | | 1 | | | | — | | | | — | | | | — | % |
| | | Warrants for 4.788% of the outstanding Class B non-voting LLC interests (strike price $0.01), expires 8/13/2024ˆ | | | | 4 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 6,219,288 | | | | 4,654,907 | | | | 5.11 | % |
West World Media, LLC Information and Data Services | | | Limited Liability Company Interestsˆ,(8) | | | | 148,326 | | | | 430,500 | | | | 2,200,000 | | | | 2.41 | % |
Total Affiliate Investments | | | | | | | | | | | 25,143,972 | | | | 13,518,980 | | | | 14.83 | % |
Other Investments | | | | | | | | | | | | | | | | | | | | |
310E53RD, LLC Real Estate Holding Company | | | Senior Secured Term Loan, 10.20% (one month LIBOR plus 10.00%, 10.15% floor, 16.00% cap) 7/1/2017 | | | $ | 6,000,000 | | | | 5,892,323 | | | | 5,892,323 | | | | 6.47 | % |
Ads Direct Media, Inc. Internet Advertising | | | Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.00%, 13.50% floor) 10/9/2017 | | | $ | 2,200,000 | | | | 2,184,159 | | | | 2,178,294 | | | | 2.39 | % |
| | | Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024ˆ | | | | 1 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 2,184,159 | | | | 2,178,294 | | | | 2.39 | % |
AP Gaming I, LLC Gambling Machine Manufacturer | | | Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020 | | | $ | 3,979,747 | | | | 3,941,528 | | | | 3,920,052 | | | | 4.30 | % |
Attention Transit Advertising Systems, LLC Outdoor Advertising Services | | | Senior Secured Term Loan, 11.50%, 9/30/2016 | | | $ | 1,857,301 | | | | 1,857,301 | | | | 1,979,511 | | | | 2.17 | % |
Background Images, Inc. Equipment Rental Services | | | Senior Secured Term Loan – Term A, 14.70% (one month LIBOR plus 14.50%), 9/1/2016(10) | | | $ | 127,497 | | | | 127,497 | | | | 157,841 | | | | 0.17 | % |
| | | Senior Secured Term Loan – Term B, 16.45% (one month LIBOR plus 16.25%), 9/1/2016(10) | | | $ | 466,095 | | | | 466,095 | | | | 483,248 | | | | 0.53 | % |
| | | | | | | | | | | 593,592 | | | | 641,089 | | | | 0.70 | % |
Bioventus, LLC Specialty Pharmaceuticals | | | Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020 | | | $ | 6,000,000 | | | | 5,947,337 | | | | 5,910,000 | | | | 6.49 | % |
Davidzon Radio, Inc. Radio Broadcasting | | | Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020 | | | $ | 10,637,590 | | | | 8,843,734 | | | | 9,512,842 | | | | 10.44 | % |
See notes to consolidated financial statements.
6
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
September 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Other Investments (continued) | | | | | | | | | | | | | | | | | | | | |
Fuse, LLC Television Programming | | | Senior Secured Note, 10.375%, 7/1/2019 | | | $ | 7,000,000 | | | $ | 7,039,339 | | | $ | 5,635,000 | | | | 6.19 | % |
GC Pivotal, LLC Data Connectivity Services Company | | | Unsecured Notes, 11.00%, 12/31/2020 | | | $ | 3,164,000 | | | | 3,171,782 | | | | 3,166,637 | | | | 3.48 | % |
General Cannabis Corp. Non-Residential Property Owner | | | Common Stockˆ | | | | 498,853 | | | | 415,771 | | | | 563,704 | | | | 0.62 | % |
Good Technology Corporation Mobile Device Management | | | Senior Secured Note, 5.00%, 10/1/2017 | | | $ | 10,000,000 | | | | 8,370,701 | | | | 11,000,000 | | | | 12.07 | % |
| | | Warrants for 203.252 shares (at a $4.92 strike price), expire 9/30/2018ˆ | | | | 10,000 | | | | 2,289,400 | | | | — | | | | — | % |
| | | | | | | | | | | 10,660,101 | | | | 11,000,000 | | | | 12.07 | % |
Granite Ridge Energy, LLC Power Generation | | | Common Stockˆ | | | | 60,000 | | | | 12,975,000 | | | | 12,750,000 | | | | 14.00 | % |
GW Power, LLC and Greenwood Fuels WI, LLC Electric Services | | | Senior Secured Term Loan, 12.20% (one month LIBOR plus 12.00%, 12.16% floor), 3/31/2016 | | | $ | 3,120,388 | | | | 3,111,796 | | | | 3,115,395 | | | | 3.42 | % |
Infinite Aegis Group, LLC Healthcare Billing and Collections | | | Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023ˆ | | | | 1 | | | | 107,349 | | | | — | | | | — | % |
JN Medical Corporation Biological Products | | | Senior Secured Term Loan, 11.25%, (one month LIBOR plus 11.00%, 11.25% floor, 12.00% cap), 6/30/2016 | | | $ | 3,500,000 | | | | 3,485,467 | | | | 3,500,000 | | | | 3.84 | % |
Lee Enterprises, Incorporated Daily and Weekly Newspaper Publisher | | | Senior Secured Notes, 9.50%, 3/15/2022 | | | $ | 3,000,000 | | | | 3,064,908 | | | | 2,790,000 | | | | 3.06 | % |
Liquidnet Holdings, Inc. Equities Trading Platform | | | Senior Secured Term Loan, 7.75% (one month LIBOR plus 6.75%, 7.75% floor), 5/22/2019 | | | $ | 2,971,769 | | | | 2,867,047 | | | | 2,867,757 | | | | 3.15 | % |
Luling Lodging, LLC Hotel Operator | | | Senior Secured Term Loan, 12.25% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017 | | | $ | 4,500,000 | | | | 4,465,345 | | | | 4,187,400 | | | | 4.60 | % |
New Media West, LLC Cable TV/Broadband Services | | | Senior Secured Term Loan, 9.00%, 12/31/2017(9)
| | | $ | 3,811,681 | | | | 3,811,681 | | | | — | | | | — | % |
OPS Acquisitions Limited and Ocean Protection Services Limited* Maritime Security Services | | | Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017 | | | $ | 5,422,543 | | | | 5,392,420 | | | | 5,494,121 | | | | 6.03 | % |
PEAKS Trust 2009-1* Consumer Financing | | | Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020 | | | $ | 3,089,613 | | | | 2,657,977 | | | | 2,437,704 | | | | 2.68 | % |
PR Wireless, Inc. Wireless Communications | | | Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020 | | | $ | 8,393,750 | | | | 7,599,657 | | | | 7,554,375 | | | | 8.29 | % |
| | | Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024ˆ | | | | 1 | | | | 634,145 | | | | 209,844 | | | | 0.23 | % |
| | | | | | | | | | | 8,233,802 | | | | 7,764,219 | | | | 8.52 | % |
See notes to consolidated financial statements.
7
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
September 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Other Investments (continued) | | | | | | | | | | | | | | | | | | | | |
Pristine Environments, Inc. Building Cleaning and Maintenance Services | | | Senior Secured Revolving Loan, 11.70% (one month LIBOR plus 11.50%, 11.70% floor), 3/31/2017 | | | $ | 5,709,804 | | | $ | 5,709,804 | | | $ | 5,904,508 | | | | 6.48 | % |
| | | Senior Secured Term Loan A, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017 | | | $ | 1,586,375 | | | | 1,581,710 | | | | 1,651,258 | | | | 1.81 | % |
| | | Senior Secured Term Loan B, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017 | | | $ | 2,965,625 | | | | 2,924,542 | | | | 3,080,395 | | | | 3.38 | % |
| | | | | | | | | | | 10,216,056 | | | | 10,636,161 | | | | 11.67 | % |
RiceBran Technologies Corporation Grain Mill Products | | | Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018 | | | $ | 1,493,106 | | | | 1,436,953 | | | | 1,436,953 | | | | 1.58 | % |
| | | Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018 | | | $ | 2,500,000 | | | | 2,358,714 | | | | 2,358,714 | | | | 2.59 | % |
| | | Warrants for 300,000 (at a $5.25 strike price), expires 5/12/2020ˆ | | | | 300,000 | | | | 39,368 | | | | 21,000 | | | | 0.02 | % |
| | | | | | | | | | | 3,835,035 | | | | 3,816,667 | | | | 4.19 | % |
Sundberg America, LLC et al. Appliance Parts Distributor | | | Senior Secured Notes, 9.50%, 4/30/2020 | | | $ | 8,000,000 | | | | 7,960,267 | | | | 7,925,333 | | | | 8.70 | % |
The Selling Source, LLC Information and Data Services | | | Senior Secured Term Loan, 12.54%, 12/31/2017 | | | $ | 3,957,921 | | | | 3,945,047 | | | | 3,318,057 | | | | 3.64 | % |
US Shale Solutions, Inc. Oil and Gas Field Services | | | Senior Secured Note, 12.50%, 9/1/2017(9)
| | | $ | 9,000,000 | | | | 6,641,957 | | | | 1,845,000 | | | | 2.03 | % |
| | | Warrants for 2.78 shares (at a $0.01 strike price), expire 9/1/2024ˆ | | | | 9,000 | | | | 114 | | | | — | | | | — | % |
| | | | | | | | | | | 6,642,071 | | | | 1,845,000 | | | | 2.03 | % |
Total Other Investments | | | | | | | | | | | 133,318,235 | | | | 122,847,266 | | | | 134.85 | % |
Total Investments | | | | | | | | | | $ | 169,824,391 | | | $ | 142,056,414 | | | | 155.93 | % |
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Counterparty | | Instrument | | # of Contracts | | Notional | | Cost | | Fair Value | | % of Net Asset Value |
Open Swap Contract
| | | | | | | | | | | | | | | | | | | | | | | | |
Reef Road Master Fund, Ltd. | | | Total Return Swap, Pay Total Return on 60,000 shares of Granite Ridge Energy, LLC, Receive 3.00% Fixed Rate, expires June 29, 2016 | | | | 1 | | | $ | 12,750,000 | | | $ | — | | | $ | 225,000 | | | | 0.25 | % |
See notes to consolidated financial statements.
8
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
September 30, 2015
The following tables show the fair value of our portfolio of investments by geography and industry as of September 30, 2015. The below tables do not include our open swap contract.
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| | September 30, 2015 |
Geography | | Investment at Fair Value (in millions) | | Percentage of Net Assets |
United States | | $ | 136.5 | | | | 149.81 | % |
United Kingdom | | | 5.5 | | | | 6.03 | |
Canada | | | 0.1 | | | | 0.09 | |
Total | | $ | 142.1 | | | | 155.93 | % |
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| | September 30, 2015 |
Industry | | Investment at Fair Value (in millions) | | Percentage of Net Assets |
Power Generation | | $ | 12.8 | | | | 14.00 | % |
Mobile Device Management | | | 11.0 | | | | 12.07 | |
Building Cleaning and Maintenance Services | | | 10.6 | | | | 11.68 | |
Radio Broadcasting | | | 9.5 | | | | 10.44 | |
Appliance Parts Distributor | | | 7.9 | | | | 8.70 | |
Wireless Communications | | | 7.8 | | | | 8.52 | |
Consumer Financing | | | 7.5 | | | | 8.24 | |
Oil and Gas Field Services | | | 6.5 | | | | 7.13 | |
Specialty Pharmaceuticals | | | 5.9 | | | | 6.49 | |
Real Estate Holdings Company | | | 5.9 | | | | 6.47 | |
Television Programming | | | 5.6 | | | | 6.18 | |
Information and Data Services | | | 5.5 | | | | 6.06 | |
Maritime Security Services | | | 5.5 | | | | 6.03 | |
Hotel Operator | | | 4.2 | | | | 4.60 | |
Gambling Machine Manufacturer | | | 3.9 | | | | 4.30 | |
Grain Mill Products | | | 3.8 | | | | 4.19 | |
Food Distributors and Wholesalers | | | 3.8 | | | | 4.17 | |
Biological Products | | | 3.5 | | | | 3.84 | |
Data Connectivity Service Company | | | 3.2 | | | | 3.48 | |
Electric Services | | | 3.1 | | | | 3.42 | |
Equities Trading Platform | | | 2.9 | | | | 3.15 | |
Daily and Weekly Newspaper Publisher | | | 2.8 | | | | 3.06 | |
Internet Advertising | | | 2.2 | | | | 2.39 | |
Munitions | | | 2.2 | | | | 2.37 | |
Outdoor Advertising Services | | | 2.0 | | | | 2.17 | |
Energy Efficiency Services | | | 0.7 | | | | 0.77 | |
Equipment Rental Services | | | 0.6 | | | | 0.70 | |
Non-Residential Property Owner | | | 0.6 | | | | 0.62 | |
Asset Recovery Services | | | 0.5 | | | | 0.60 | |
Geophysical Surveying and Mapping Services | | | 0.1 | | | | 0.09 | |
Cable TV/Broadband Services | | | — | | | | — | |
Healthcare Billing and Collections Servicer | | | — | | | | — | |
Total | | $ | 142.1 | | | | 155.93 | % |
See notes to consolidated financial statements.
9
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
September 30, 2015
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| (1) | The Company’s investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act of 1933. |
| (2) | A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (“London Interbank Offered Rate”) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of September 30, 2015. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate. |
| (3) | “Control Investments” are investments in those companies that are “Control Investments” of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a “Control Investment” of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
| (4) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the Investment Company Act of 1940, which are not “Control Investments.” A company is deemed to be an “Affiliate” of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
| (5) | Full Circle Capital Corporation’s equity investment in Takoda Resources Inc. is held through its wholly owned subsidiary FC Takoda Holdings, LLC. |
| (6) | Full Circle Capital Corporation’s equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly owned subsidiary TransAmerican Asset Servicing Group, Inc. |
| (7) | Full Circle Capital Corporation’s equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly owned subsidiary FC New Specialty Foods, Inc. |
| (8) | A portion of Full Circle Capital Corporation’s investment in West World Media, LLC is held through its wholly owned subsidiary Full Circle West, Inc. The remainder of the LLC interests are held directly by Full Circle Capital Corporation. |
| (9) | Investments were on non-accrual status as of September 30, 2015. |
| (10) | The investments in Background Images Inc. were placed on non-accrual status effective October 16, 2015. |
| * | Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. |
| ** | Security pays all or a portion of its interest in kind. |
| ˆ | Security is a nonincome-producing security. |
See notes to consolidated financial statements.
10
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Control Investments(3)
| | | | | | | | | | | | | | | | | | | | |
Takoda Resources Inc.* Geophysical Surveying and Mapping Services | | | Senior Secured Term Loan, 16.00%, 4/1/2016(9)
| | | $ | 3,054,532 | | | $ | 3,054,532 | | | $ | 161,585 | | | | 0.16 | % |
| | | Common Stockˆ,(5) | | | | 749 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 3,054,532 | | | | 161,585 | | | | 0.16 | % |
Texas Westchester Financial, LLC Consumer Financing | | | Limited Liability Company Interestsˆ | | | | 9,278 | | | | 491,713 | | | | 177,500 | | | | 0.18 | % |
The Finance Company, LLC Consumer Financing | | | Senior Secured Term Loan, 15.00% (one month LIBOR plus 14.25%, 15.00% floor), 9/30/2015 | | | $ | 4,195,915 | | | | 4,187,977 | | | | 4,204,167 | | | | 4.21 | % |
| | | Limited Liability Company Interests | | | | 50 | | | | 140,414 | | | | 802,027 | | | | 0.80 | % |
| | | | | | | | | | | 4,328,391 | | | | 5,006,194 | | | | 5.01 | % |
TransAmerican Asset Servicing Group, LLC Asset Recovery Services | | | Senior Secured Revolving Loan, 12.00%, 7/25/2016(9)
| | | $ | 3,563,246 | | | | 3,534,960 | | | | 466,785 | | | | 0.47 | % |
| | | Limited Liability Company Interestsˆ,(6) | | | | 75 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 3,534,960 | | | | 466,785 | | | | 0.47 | % |
Total Control Investments
| | | | | | | | | | | 11,409,596 | | | | 5,812,064 | | | | 5.82 | % |
Affiliate Investments(4)
| | | | | | | | | | | | | | | | | | | | |
Modular Process Control, LLC Energy Efficiency Services | | | Senior Secured Revolving Loan, 14.50% (one month LIBOR plus 13.50%, 14.50% floor), 3/28/2017 | | | $ | 1,297,884 | | | | 1,294,200 | | | | 1,175,320 | | | | 1.18 | % |
| | | Senior Secured Term Loan, 15.50% (one month LIBOR plus 14.50%, 15.50% floor), 3/28/2017 | | | $ | 4,900,000 | | | | 4,743,125 | | | | 2,296,957 | | | | 2.30 | % |
| | | Senior Secured Term Loan – Tranche 2, 18.00% (one month LIBOR plus 17.00%, 18.00% floor), 3/28/2017** | | | $ | 953,143 | | | | 953,143 | | | | 191,550 | | | | 0.19 | % |
| | | Warrant for 14.50% of the outstanding Class B LLC Interests (at a $0.01 strike price), expires 3/28/2023ˆ | | | | 1 | | | | 288,000 | | | | — | | | | — | % |
| | | | | | | | | | | 7,278,468 | | | | 3,663,827 | | | | 3.67 | % |
ProGrade Ammo Group, LLC Munitions | | | Senior Secured Revolving Loan, 9.19% (one month LIBOR plus 9.00%, 9.19% floor), 3/30/2016(9)
| | | $ | 1,821,447 | | | | 1,821,447 | | | | 1,821,447 | | | | 1.82 | % |
| | | Senior Secured Term Loan, 16.19% (one month LIBOR plus 16.00%, 16.19% floor), 3/30/2016(9)
| | | $ | 4,843,750 | | | | 4,843,750 | | | | 768,862 | | | | 0.77 | % |
| | | Warrants for 19.9% of the outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018ˆ | | | | 181,240 | | | | 176,770 | | | | — | | | | — | % |
| | | | | | | | | | | 6,841,967 | | | | 2,590,309 | | | | 2.59 | % |
SOLEX Fine Foods, LLC; Catsmo, LLC Food Distributors and Wholesalers | | | Senior Secured Term Loan, 12.33% (one month LIBOR plus 12.14%), 12/28/2016 | | | $ | 3,861,696 | | | | 3,814,813 | | | | 3,832,347 | | | | 3.83 | % |
| | | Limited Liability Company Interestsˆ,(7) | | | | 1 | | | | 290,284 | | | | — | | | | — | % |
| | | Warrants for 1.6% of the outstanding LLC interests (strike price $0.01), expire 12/31/2022ˆ,(7) | | | | 1 | | | | 58,055 | | | | — | | | | — | % |
| | | | | | | | | | | 4,163,152 | | | | 3,832,347 | | | | 3.83 | % |
See notes to consolidated financial statements.
11
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Affiliate Investments (continued)
| | | | | | | | | | | | | | | | | | | | |
US Oilfield Company, LLC Oil and Gas Field Services | | | Senior Secured Revolving Loan, 12.69% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 545,118 | | | $ | 545,118 | | | $ | 545,118 | | | | 0.55 | % |
| | | Senior Secured Term Loan A, 12.69% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 854,167 | | | | 847,155 | | | | 840,415 | | | | 0.84 | % |
| | | Senior Secured Term Loan B, 12.69% (one month LIBOR plus 12.50%), 8/13/2017 | | | $ | 4,368,132 | | | | 4,328,366 | | | | 4,297,805 | | | | 4.30 | % |
| | | Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024ˆ | | | | 1 | | | | — | | | | — | | | | — | % |
| | | Warrants for 1.824% of the outstanding Class B non-voting LLC interests (strike price $0.01), expires 8/13/2024ˆ | | | | 2 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | 5,720,639 | | | | 5,683,338 | | | | 5.69 | % |
West World Media, LLC Information and Data Services | | | Limited Liability Company Interestsˆ,(8) | | | | 148,326 | | | | 430,500 | | | | 249,451 | | | | 0.25 | % |
Total Affiliate Investments | | | | | | | | | | | 24,434,726 | | | | 16,019,272 | | | | 16.03 | % |
Other Investments
| | | | | | | | | | | | | | | | | | | | |
Ads Direct Media, Inc. Internet Advertising | | | Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.00%, 13.50% floor) 10/9/2017 | | | $ | 2,406,250 | | | | 2,387,763 | | | | 2,392,294 | | | | 2.39 | % |
| | | Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024ˆ | | | | 1 | | | | — | | | | — | | | | — | % |
| | | | | | | | | | | 2,387,763 | | | | 2,392,294 | | | | 2.39 | % |
AP Gaming I, LLC Gambling Machine Manufacturer | | | Unfunded Revolving Loan, 8.25%, 12/20/2018(10) | | | $ | — | | | | (146,988 | ) | | | (146,988 | ) | | | (0.15 | )% |
| | | Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020 | | | $ | 3,989,873 | | | | 3,950,167 | | | | 3,950,167 | | | | 3.95 | % |
| | | | | | | | | | | 3,803,179 | | | | 3,803,179 | | | | 3.80 | % |
Attention Transit Advertising Systems, LLC Outdoor Advertising Services | | | Senior Secured Term Loan, 11.50%, 9/30/2016 | | | $ | 1,915,341 | | | | 1,915,341 | | | | 1,979,058 | | | | 1.98 | % |
Background Images, Inc. Equipment Rental Services | | | Senior Secured Term Loan – Term A, 14.69% (one month LIBOR plus 14.50%), 7/31/2015 | | | $ | 132,866 | | | | 132,866 | | | | 146,525 | | | | 0.15 | % |
| | | Senior Secured Term Loan – Term B, 16.44% (one month LIBOR plus 16.25%), 7/31/2015 | | | $ | 485,725 | | | | 485,725 | | | | 493,449 | | | | 0.49 | % |
| | | | | | | | | | | 618,591 | | | | 639,974 | | | | 0.64 | % |
Bioventus, LLC Specialty Pharmaceuticals | | | Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020 | | | $ | 6,000,000 | | | | 5,944,426 | | | | 5,970,000 | | | | 5.97 | % |
Butler Burgher Group, LLC Real Estate Management Services | | | Senior Secured Revolving Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017 | | | $ | 750,000 | | | | 745,237 | | | | 800,000 | | | | 0.80 | % |
| | | Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017 | | | $ | 7,349,264 | | | | 7,302,515 | | | | 7,716,728 | | | | 7.72 | % |
| | | | | | | | | | | 8,047,752 | | | | 8,516,728 | | | | 8.52 | % |
See notes to consolidated financial statements.
12
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Other Investments (continued)
| | | | | | | | | | | | | | | | | | | | |
Davidzon Radio, Inc. Radio Broadcasting | | | Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020 | | | $ | 10,897,013 | | | $ | 8,991,089 | | | $ | 9,262,098 | | | | 9.27 | % |
Fuse, LLC Television Programming | | | Senior Secured Note, 10.375%, 7/1/2019 | | | $ | 7,000,000 | | | | 7,041,962 | | | | 5,775,000 | | | | 5.78 | % |
GC Pivotal, LLC Data Connectivity Services Company | | | Unsecured Notes, 11.00%, 12/31/2020 | | | $ | 3,164,000 | | | | 3,171,910 | | | | 3,171,910 | | | | 3.17 | % |
General Cannabis Corp. Non-Residential Property Owner | | | Common Stockˆ | | | | 654,409 | | | | 515,094 | | | | 1,308,818 | | | | 1.31 | % |
GK Holdings Inc. IT and Business Skill Training | | | Subordinated Secured Term Loan, 10.50% (one month LIBOR plus 9.50%, 10.50% floor), 1/20/2022 | | | $ | 2,000,000 | | | | 1,962,074 | | | | 1,980,000 | | | | 1.98 | % |
Good Technology Corporation Mobile Device Management | | | Senior Secured Note, 5.00%, 10/1/2017
| | | $ | 10,000,000 | | | | 8,201,173 | | | | 8,845,667 | | | | 8.85 | % |
| | | Warrants for 203.252 shares (at a $4.92 strike price), expire 9/30/2018ˆ | | | | 10,000 | | | | 2,289,400 | | | | 2,289,400 | | | | 2.29 | % |
| | | | | | | | | | | 10,490,573 | | | | 11,135,067 | | | | 11.14 | % |
Granite Ridge Energy, LLC Power Generation | | | Common Stockˆ | | | | 60,000 | | | | 12,975,000 | | | | 12,975,000 | | | | 12.98 | % |
GW Power, LLC and Greenwood Fuels WI, LLC Electric Services | | | Senior Secured Term Loan, 12.19% (one month LIBOR plus 12.00%, 12.16% floor), 3/31/2016 | | | $ | 5,320,388 | | | | 5,299,835 | | | | 5,255,480 | | | | 5.26 | % |
Infinite Aegis Group, LLC Healthcare Billing and Collections | | | Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023ˆ | | | | 1 | | | | 107,349 | | | | — | | | | — | % |
JN Medical Corporation Biological Products | | | Senior Secured Term Loan, 11.25%, (one month LIBOR plus 11.00%, 11.25% floor, 12.00% cap), 6/30/2016 | | | $ | 3,500,000 | | | | 3,481,766 | | | | 3,449,367 | | | | 3.45 | % |
Lee Enterprises, Incorporated Daily and Weekly Newspaper Publisher | | | Senior Secured Notes, 9.50%, 3/15/2022 | | | $ | 2,000,000 | | | | 2,045,000 | | | | 2,045,000 | | | | 2.05 | % |
Luling Lodging, LLC Hotel Operator | | | Senior Secured Term Loan, 12.25% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017 | | | $ | 4,500,000 | | | | 4,463,119 | | | | 4,303,650 | | | | 4.31 | % |
Medinet Investments, LLC Medical Liability Claims Factoring | | | Senior Secured Revolving Loan, 13.50%, (one month LIBOR plus 13.00%, 13.50% floor), 7/23/2017 | | | $ | 188,313 | | | | 183,211 | | | | 103,083 | | | | 0.10 | % |
New Media West, LLC Cable TV/Broadband Services | | | Senior Secured Term Loan, 9.00%, 12/31/2017(9)
| | | $ | 3,811,681 | | | | 3,811,681 | | | | — | | | | — | % |
OPS Acquisitions Limited and Ocean Protection Services Limited* Maritime Security Services | | | Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017 | | | $ | 5,950,000 | | | | 5,913,412 | | | | 5,968,246 | | | | 5.97 | % |
PEAKS Trust 2009-1* Consumer Financing | | | Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020 | | | $ | 3,450,828 | | | | 2,947,443 | | | | 2,705,449 | | | | 2.71 | % |
See notes to consolidated financial statements.
13
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
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Description and Industry(1) | | Type of Investment(2) | | Par Amount/ Quantity | | Cost | | Fair Value | | % of Net Asset Value |
Other Investments (continued)
| | | | | | | | | | | | | | | | | | | | |
PR Wireless, Inc. Wireless Communications | | | Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020 | | | $ | 8,415,000 | | | $ | 7,618,897 | | | $ | 7,573,500 | | | | 7.58 | % |
| | | Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024ˆ | | | | 1 | | | | 634,145 | | | | 378,675 | | | | 0.38 | % |
| | | | | | | | | | | 8,253,042 | | | | 7,952,175 | | | | 7.96 | % |
Pristine Environments, Inc. Building Cleaning and Maintenance Services | | | Senior Secured Revolving Loan, 11.70% (one month LIBOR plus 11.50%, 11.70% floor), 3/31/2017 | | | $ | 5,614,310 | | | | 5,614,310 | | | | 5,863,211 | | | | 5.87 | % |
| | | Senior Secured Term Loan A, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017 | | | $ | 1,607,656 | | | | 1,602,678 | | | | 1,685,037 | | | | 1.69 | % |
| | | Senior Secured Term Loan B, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017 | | | $ | 3,026,563 | | | | 2,979,285 | | | | 3,172,039 | | | | 3.17 | % |
| | | | | | | | | | | 10,196,273 | | | | 10,720,287 | | | | 10.73 | % |
RiceBran Technologies Corporation Grain Mill Products | | | Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018 | | | $ | 1,000,000 | | | | 939,362 | | | | 939,362 | | | | 0.94 | % |
| | | Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018 | | | $ | 2,500,000 | | | | 2,348,330 | | | | 2,348,330 | | | | 2.35 | % |
| | | Warrants for 300,000 (at a $5.25 strike price), expires 5/12/2020ˆ | | | | 300,000 | | | | 39,368 | | | | 27,000 | | | | 0.03 | % |
| | | | | | | | | | | 3,327,060 | | | | 3,314,692 | | | | 3.32 | % |
Sundberg America, LLC et al. Appliance Parts Distributor | | | Senior Secured Notes, 9.50%, 4/30/2020 | | | $ | 8,000,000 | | | | 7,960,112 | | | | 7,960,112 | | | | 7.97 | % |
The Selling Source, LLC Information and Data Services | | | Senior Secured Term Loan, 15.00%, 12/31/2017** | | | $ | 3,869,881 | | | | 3,855,453 | | | | 3,140,666 | | | | 3.14 | % |
US Shale Solutions, Inc. Oil and Gas Field Services | | | Senior Secured Note, 12.50%, 9/1/2017(9)
| | | $ | 9,000,000 | | | | 6,641,957 | | | | 4,455,000 | | | | 4.46 | % |
| | | Warrants for 2.78 shares (at a $0.01 strike price), expire 9/1/2024ˆ | | | | 9,000 | | | | 114 | | | | 90 | | | | 0.00 | % |
| | | | | | | | | | | 6,642,071 | | | | 4,455,090 | | | | 4.46 | % |
Total Other Investments | | | | | | | | | | | 136,351,581 | | | | 130,282,423 | | | | 130.36 | % |
Total Investments | | | | | | | | | | $ | 172,195,903 | | | $ | 152,113,759 | | | | 152.21 | % |
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Counterparty | | Instrument | | # of Contracts | | Notional | | Cost | | Fair Value | | % of Net Asset Value |
Open Swap Contract
| | | | | | | | | | | | | | | | | | | | | | | | |
Reef Road Master Fund, Ltd. | | | Total Return Swap, Pay Total Return on 60,000 shares of Granite Ridge Energy, LLC, Receive 3.00% Fixed Rate, expires June 29, 2016 | | | | 1 | | | $ | 12,975,000 | | | $ | — | | | $ | — | | | | — | % |
See notes to consolidated financial statements.
14
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
The following tables show the fair value of our portfolio of investments by geography and industry as of June 30, 2015.
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| | June 30, 2015 |
Geography | | Investment at Fair Value (in millions) | | Percentage of Net Assets |
United States | | $ | 145.9 | | | | 146.08 | % |
United Kingdom | | | 6.0 | | | | 5.97 | |
Canada | | | 0.2 | | | | 0.16 | |
Total | | $ | 152.1 | | | | 152.21 | % |
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| | June 30, 2015 |
Industry | | Investment at Fair Value (in millions) | | Percentage of Net Assets |
Power Generation | | $ | 13.0 | | | | 12.98 | % |
Mobile Device Management | | | 11.1 | | | | 11.14 | |
Building Cleaning and Maintenance Services | | | 10.7 | | | | 10.73 | |
Oil and Gas Field Services | | | 10.1 | | | | 10.14 | |
Radio Broadcasting | | | 9.3 | | | | 9.27 | |
Real Estate Management Services | | | 8.5 | | | | 8.52 | |
Appliance Parts Distributor | | | 8.0 | | | | 7.97 | |
Wireless Communications | | | 8.0 | | | | 7.96 | |
Consumer Financing | | | 7.9 | | | | 7.90 | |
Specialty Pharmaceuticals | | | 6.0 | | | | 5.97 | |
Maritime Security Services | | | 6.0 | | | | 5.97 | |
Television Programming | | | 5.8 | | | | 5.78 | |
Electric Services | | | 5.2 | | | | 5.26 | |
Hotel Operator | | | 4.3 | | | | 4.31 | |
Food Distributors and Wholesalers | | | 3.8 | | | | 3.83 | |
Gambling Machine Manufacturer | | | 3.8 | | | | 3.81 | |
Energy Efficiency Services | | | 3.6 | | | | 3.67 | |
Biological Products | | | 3.4 | | | | 3.45 | |
Information and Data Services | | | 3.4 | | | | 3.39 | |
Grain Mill Products | | | 3.3 | | | | 3.32 | |
Data Connectivity Service Company | | | 3.2 | | | | 3.17 | |
Munitions | | | 2.6 | | | | 2.59 | |
Internet Advertising | | | 2.4 | | | | 2.39 | |
Daily and Weekly Newspaper Publisher | | | 2.0 | | | | 2.05 | |
IT and Business Skill Training | | | 2.0 | | | | 1.98 | |
Outdoor Advertising Services | | | 2.0 | | | | 1.98 | |
Non-Residential Property Owner | | | 1.3 | | | | 1.31 | |
Equipment Rental Services | | | 0.6 | | | | 0.64 | |
Asset Recovery Services | | | 0.5 | | | | 0.47 | |
Geophysical Surveying and Mapping Services | | | 0.2 | | | | 0.16 | |
Medical Liability Claims Factoring | | | 0.1 | | | | 0.10 | |
Cable TV/Broadband Services | | | — | | | | — | |
Total | | $ | 152.1 | | | | 152.21 | % |
See notes to consolidated financial statements.
15
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
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| (1) | The Company’s investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act of 1933. |
| (2) | A majority of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (“London Interbank Offered Rate”) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2015. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate. |
| (3) | “Control Investments” are investments in those companies that are “Control Investments” of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a “Control Investment” of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
| (4) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the Investment Company Act of 1940, which are not “Control Investments.” A company is deemed to be an “Affiliate” of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
| (5) | Full Circle Capital Corporation’s equity investment in Takoda Resources Inc. is held through its wholly owned subsidiary FC Takoda Holdings, LLC. |
| (6) | Full Circle Capital Corporation’s equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly owned subsidiary TransAmerican Asset Servicing Group, Inc. |
| (7) | Full Circle Capital Corporation’s equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly owned subsidiary FC New Specialty Foods, Inc. |
| (8) | A portion of Full Circle Capital Corporation’s investment in West World Media, LLC is held through its wholly owned subsidiary Full Circle West, Inc. The remainder of the LLC interests are held directly by Full Circle Capital Corporation. |
| (9) | Investments were on non-accrual status as of June 30, 2015. |
| (10) | The negative fair value is the result of the unfunded commitment being valued below par. These amounts may or may not be funded to the borrowing party now or in the future. |
| * | Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. |
| ** | Security pays all or a portion of its interest in kind. |
| ˆ | Security is a nonincome-producing security. |
See notes to consolidated financial statements.
16
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 1. Organization
References herein to “we”, “us” or “our” refer to Full Circle Capital Corporation and Subsidiaries (“Full Circle Capital” or the “Company”) unless the context specifically requires otherwise.
We were formed as Full Circle Capital Corporation, a Maryland corporation, on April 16, 2010 and were funded in an initial public offering, or IPO, completed on August 31, 2010. We are a non-diversified, closed-end investment company that has filed an election to be treated as a business development company, or BDC, under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we expect to qualify annually as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1989, as amended, which we refer to as the Code. We invest primarily in senior secured term debt issued by lower middle-market and middle-market companies. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.
Note 2. Significant Accounting Policies
Use of Estimates and Basis of Presentation
The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reporting period. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ materially.
Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending June 30, 2016.
The June 30, 2015 and September 30, 2014 Consolidated Financial Statements were reclassified in order to be consistent with the new format used for the September 30, 2015 Consolidated Financial Statements.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright, or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities owned by another company or person.
Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments in other, non-security financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled are reported as receivables for investments sold and payables for investments acquired, respectively, in the Consolidated Statements of Assets and Liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 2. Significant Accounting Policies – (continued)
Basis of Consolidation
Under the 1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, we are 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 us. Our Consolidated Financial Statements include our accounts and the accounts of Full Circle West, Inc., FC New Media, Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC, our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Valuation of Investments
In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers or market makers. Debt and equity securities for which market quotations are not readily available or are not considered to be the best estimate of fair value are valued at fair value as determined in good faith by the Board of Directors (the “Board”). Because the Company expects that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Board in accordance with a documented valuation policy that has been reviewed and approved by the Board and in accordance with GAAP. Due to the inherent uncertainty 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 the differences could be material.
In determining fair value, Full Circle Capital’s Board uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board. Unobservable inputs reflect the Board’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the “Audit Committee”), does not represent fair value, are valued as follows:
| 1. | The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment; |
| 2. | Preliminary valuation conclusions are then documented and discussed with the Company’s senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct independent appraisals or review management’s preliminary valuations or make their own independent assessment, for certain assets; |
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September 30, 2015
Note 2. Significant Accounting Policies – (continued)
| 3. | The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and |
| 4. | The Board then discusses the recommended valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Company’s senior management, estimates from the independent valuation firms and the recommendations of the Audit Committee. |
GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from investment to investment and is affected by a wide variety of factors, including the type of investment, whether the investment is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for investments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause an investment to be reclassified to a lower level within the fair value hierarchy.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 2. Significant Accounting Policies – (continued)
Valuation Techniques
Senior and Subordinated Loans
The Company’s portfolio consists primarily of private debt instruments such as senior and subordinated loans. Investments for which market quotations are readily available (“Level 2 Debt”) are generally valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers. For other debt investments (“Level 3 Debt”), market quotations are not available and other techniques are used to determine fair value. The Company considers its Level 3 Debt to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner, the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 Debt, the Board considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions, success and prepayment fees, and other relevant factors, both qualitative and quantitative. In the event that a Level 3 Debt instrument is not performing, as defined above, the Board may evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 Debt instrument.
This evaluation will be updated no less than quarterly for Level 3 Debt instruments that are not performing, and more frequently for time periods where there are significant changes in the investor base or significant changes in the perceived value of the underlying collateral. The collateral value will be analyzed on an ongoing basis using internal metrics, appraisals, third-party valuation agents and other data as may be acquired and analyzed by management and the Board.
Investments in Private Companies
The Board determines the fair value of its investments in private companies where no market quotations are readily available (“Level 3 Private Companies”) by incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, and performance multiples, among other factors, including work performed by third-party valuation agents. The Level 3 Private Companies investments can include Limited Liability Company interests, common stock and other equity investments. These nonpublic investments are included in Level 3 of the fair value hierarchy.
Warrants
The Board ascribes value to warrants based on fair value analyses that can include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
Publicly Traded Common Stock
Publicly traded common stock in an active market (“Level 1 common stock”) is valued based on unadjusted quoted prices in active markets for identical Level 1 common stock that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 common stock.
Swap Contracts
Derivative financial instruments such as swap contracts are valued based on discounted cash flow models and options pricing models, as appropriate. Models use observable data to the extent practicable. However, areas such as credit risk (both our own and that of the counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of derivative financial instruments at the valuation date.
The Company’s accounting policy is to not offset fair value amounts recognized for derivative financial instruments. The related assets and liabilities are presented gross in the Consolidated Statements of Assets and Liabilities. Any cash collateral payables or receivables associated with these instruments are not added to or netted against the fair value amounts of the derivative financial instruments.
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September 30, 2015
Note 2. Significant Accounting Policies – (continued)
All derivative financial instruments are carried in assets when amounts are receivable by the Company and in liabilities when amounts are payable by the Company. During the period a contract is open, changes in the value of the contracts are recognized as unrealized appreciation or depreciation to reflect the fair value of the contract at the reporting date. When the contracts settle, mature, terminate, or are otherwise closed, the Company records realized gains or losses equal to the difference between the proceeds from (or cost of) the close-out of the contracts and the original contract price. Additionally, the Company records realized gains (losses) on open swap contracts when periodic payments are received or made at the end of each measurement period.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and accrued liabilities, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are disclosed in Note 8.
Cash
The Company places its cash with Santander Bank, N.A. (“Santander Bank”) and, at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.
Revenue Recognition
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with senior and subordinated secured loans are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a senior or subordinated secured loan, any unamortized loan origination, closing and/or commitment fees are recorded as interest income. Generally, when a payment default occurs on a loan in the portfolio, or if the Company otherwise believes that the issuer of the loan will not be able to make contractual interest payments, the Company may place the loan on non-accrual status and cease recognizing interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient collateral value and is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in or sale of the business, the sale of the assets of the business, or some portion or combination thereof.
Dividend income is recorded on the ex-dividend date.
Structuring fees, excess deal deposits, prepayment fees, management fee income and similar fees are recognized as Other Income from Investments as earned, usually when received. Other fee income, including administrative and unused line fees, is included in Other Income from Investments. Income from such sources was $510,800 and $209,025 for the three months ended September 30, 2015 and 2014, respectively. Management fee income is included in Other Income from Non-Investment Sources. Income from such sources was $14,682 and $11,049, for the three months ended September 30, 2015 and 2014, respectively.
Change in unrealized gain (loss) on investments
Net change in unrealized appreciation or depreciation recorded on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 2. Significant Accounting Policies – (continued)
From time to time, the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Consolidated Statements of Operations as an increase in the Net Change in Unrealized Gain (Loss) on Investments.
Federal and State Income Taxes
The Company has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including payment-in-kind (“PIK”), as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) 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.
If we do not distribute (or are not deemed to have distributed) each calendar year sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our 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”), we 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 we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue 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.
Distributions
Distributions to common stockholders are recorded on the ex-dividend date. The amounts, if any, of our monthly distributions are approved by our Board each quarter and are generally based upon our management’s estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
Guarantees and Indemnification Agreements
We follow ASC Topic 460 — Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“ASC 460”). The application of ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual Consolidated Financial Statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees. ASC 460 did not have a material effect on the Consolidated Financial Statements. Refer to Note 5 for further discussion of guarantees and indemnification agreements.
Per Share Information
Basic and diluted earnings (loss) per common share is calculated using the weighted average number of common shares outstanding for the period presented. For the three months ended September 30, 2015 and 2014, respectively, basic and diluted earnings (loss) per share, were the same since there are no potentially dilutive securities outstanding.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 2. Significant Accounting Policies – (continued)
Organizational Expenses and Offering Costs
The Company did not incur organizational expenses for the three months ended September 30, 2015 or 2014. The Company complies with the requirements of ASC 340-10-S99-1, “Expenses of Offering”. Deferred offering costs consist principally of legal and audit costs incurred through the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Company’s operations if the offering is not completed. Offering expenses related to the Company’s July 14, 2014, March 30, 2015, and April 13, 2015 offerings were $1,442,780. Refer to Note 6.
Capital Accounts
Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, accumulated net unrealized appreciation or depreciation, and paid-in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest — Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires companies to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company has decided to early adopt this standard. As a result, deferred debt issuance costs of $793,700 and $833,541 at September 30, 2015 and June 30, 2015, respectively, are presented as a reduction to Notes Payable in the Consolidated Statements of Assets and Liabilities. In prior periods, the deferred debt issuance costs had been presented as assets on the Consolidated Statements of Assets and Liabilities.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU 2015-07 is effective for fiscal years beginning after December 15, 2015. The Company does not believe this standard will have an impact on its Consolidated Financial Statements.
Note 3. Concentration of Credit Risk and Liquidity Risk
In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured limits. The Company is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of such financial institutions and does not anticipate any losses from these counterparties.
The Company utilizes two financial institutions to provide financing, which are essential to its business. There are a number of other financial institutions available that could potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating results.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 4. Earnings (Loss) per Common Share — Basic and Diluted
The following information sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended September 30, 2015 and September 30, 2014:
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
| | (Unaudited) | | (Unaudited) |
Per Share Data(1):
| | | | | | | | |
Net Increase (Decrease) in Net Assets Resulting from Operations | | $ | (4,907,706 | ) | | $ | 228,698 | |
Weighted average shares outstanding for period basic and diluted | | | 23,175,342 | | | | 11,877,534 | |
Basic and diluted earnings (loss) per common share | | $ | (0.21 | ) | | $ | 0.02 | |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Per share data based on weighted average shares outstanding. |
Note 5. Related Party Agreements and Transactions
Investment Advisory Agreement
On June 22, 2015, the Board re-approved the investment advisory agreement (the “Investment Advisory Agreement”) with Full Circle Advisors, LLC (the “Adviser”) under which the Adviser, subject to the overall supervision of our Board, manages the day-to-day operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, our Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make.
The Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services, the Adviser receives a fee from us, consisting of two components, a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of our gross assets, as adjusted. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets, as adjusted, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter will be appropriately prorated.
The total base management fees earned by the Adviser for the three months ended September 30, 2015 and 2014 were $611,929 and $572,558, respectively. The total base management fees payable to the Adviser as of September 30, 2015 and 2014 were $611,929 and $572,559, after reflecting payments of $580,607 and $475,594 for the three months ended September 30, 2015 and 2014 and are included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates.
The incentive fee has two parts. The first part of the incentive fee (the “Income incentive fee”) is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as prepayment fees, management fee income and similar fees that we receive from portfolio companies, including administrative and unused line fees accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement to Full Circle Service Company (the “Administrator”), and any interest
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September 30, 2015
Note 5. Related Party Agreements and Transactions – (continued)
expenses and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay in kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include organizational costs or any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). Our net investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee. We pay the Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
| • | no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%; |
| • | 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.1875% in any calendar quarter (8.75% annualized). We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.1875%) as the “catch-up.” The “catch-up” is meant to provide our investment adviser with 20% of our pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and |
| • | 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Adviser (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Adviser). |
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date) and will equal 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio, provided that, the incentive fee determined as of December 31, 2010 was calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation from the inception of Full Circle Capital. There were no incentive fees earned on realized capital gains for the three months ended September 30, 2015 and 2014.
Income incentive fees of $481,777 and $389,850 were earned by the Adviser for the three months ended September 30, 2015 and 2014, respectively, and the total income incentive fees payable to the Adviser as of September 30, 2015 and 2014 were $481,777 and $389,851, after reflecting payments of $462,350 and $370,131 during the three months ended September 30, 2015 and 2014, respectively, and are included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates.
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 5. Related Party Agreements and Transactions – (continued)
The Adviser has agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, in excess of 1.50% of our net assets, beginning with our fiscal quarter ending September 30, 2014 through the end of our fiscal year 2015. For our fiscal year 2016 and beyond, the Adviser has agreed to reimburse us for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, in excess of 1.75% of our net assets. The expense reimbursements from the Adviser for the three months ended September 30, 2015 and 2014 were $275,156 and $282,674, respectively, and the total expense reimbursements receivable from the Adviser as of September 30, 2015 and 2014 were $275,156 and $282,674, after reflecting payments of $159,295 and $0 during the three months ended September 30, 2015 and 2014, respectively, and are included in Due from Affiliates on the Consolidated Statements of Assets and Liabilities.
The Adviser had agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and organizational and offering expenses, in excess of 2% of our net assets for the first twelve months following the completion of the initial public offering, which occurred on August 31, 2010.
For the periods commencing on April 1, 2015 and ending on June 30, 2015, and commencing on July 1, 2015 and ending on June 30, 2016, Full Circle Advisors has agreed to waive the portion of the base management fees and incentive fees that Full Circle Advisors would otherwise be entitled to receive pursuant to our Investment Advisory Agreement to the extent required in order for Full Circle Capital to earn net investment income sufficient to support the distribution payment on the shares of our common stock outstanding on the relevant record date for each monthly distribution as then declared by our board of directors. The determination of the amount to be waived will be finalized as of the end of the fiscal year for each period, with such amounts being accrued on a quarterly basis. Net investment income is defined as net income before net realized gains (losses) and unrealized gains (losses), in each case, as determined in accordance with GAAP. Full Circle Advisors will not be entitled to recoup any amount of base management fees that it waives pursuant to this agreement. For the three months ended September 30, 2015 and 2014, $221,953 and $0, respectively, of the base management fee was accrued and is included in the management fee waiver and expense reimbursement line in the Consolidated Statements of Operations.
Administration Agreement
On June 22, 2015, the Board re-approved the Administration Agreement with the Administrator under which the Administrator, among other things, furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, the Administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders. In addition, the Administrator assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of Full Circle Service Company’s overhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the compensation of our chief financial officer and our allocable portion of the compensation of any administrative support staff employed by the Administrator, directly or indirectly. Under the Administration Agreement, the Administrator will also provide on our behalf managerial assistance to those portfolio companies that request such assistance. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 5. Related Party Agreements and Transactions – (continued)
The Administrator and Conifer Asset Solutions LLC (“Conifer” or the “Sub-Administrator”) may also provide administrative services to the Adviser. As a result, the Adviser also reimburses the Administrator and/or the Sub-Administrator for its allocable portion of the Administrator’s and/or Sub-Administrator’s overhead, including rent, the fees and expenses associated with performing compliance functions for Full Circle Advisors, and its allocable portion of the compensation of any administrative support staff. To the extent the Adviser or any of its affiliates manage other investment vehicles in the future, no portion of any administrative services provided by the Administrator to such other investment vehicles will be charged to us.
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, the Administrator and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from Full Circle Capital for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Administrator’s services under the Administration Agreement or otherwise as administrator for Full Circle Capital.
Sub-Administration Agreement
The Administrator has engaged Conifer to provide certain administrative services to us. In exchange for providing such services, the Administrator pays Conifer an asset-based fee with a $200,000 annual minimum as adjusted for any reimbursement of expenses. This asset-based fee will vary depending upon our gross assets, as adjusted, as follows:
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Gross Assets | | Fee |
first $150 million of gross assets | | 20 basis points (0.20%) |
next $150 million of gross assets | | 15 basis points (0.15%) |
next $200 million of gross assets | | 10 basis points (0.10%) |
in excess of $500 million of gross assets | | 5 basis points (0.05%) |
For the three months ended September 30, 2015 and 2014, respectively, the Company incurred $195,282 and $175,677, respectively, of expenses under the Administration Agreement, $71,838 and $63,209, respectively, of which were earned by the Sub-Administrator and $76,306 and $75,913, respectively, were paid for officers’ compensation. The remaining $47,138 and $36,555, respectively, were recorded as an Allocation of Overhead Expenses in the Consolidated Statements of Operations.
FC Capital Investment Partners, LLC
On June 4, 2014, we formed FC Capital Investment Partners, LLC (“FCCIP”), a multiple series private fund, for which we serve as the managing member and investment adviser. FCCIP was formed as a Delaware limited liability company and operates under a Limited Liability Company agreement dated June 13, 2014. FCCIP closed its first series on June 17, 2014, raising approximately $5.6 million in capital from investors. FCCIP closed its second series on September 25, 2014, raising approximately $10.0 million in capital from investors. We may co-invest in certain portfolio investments from time to time with one or more series issued by FCCIP where we determine that the aggregate available investment opportunity exceeds what we believe would be appropriate for us to acquire directly, subject to certain conditions. During the three months ended September 30, 2015 and 2014, the Company recognized $14,682 and $11,049, respectively, in net management fee income related to the services performed for FCCIP. Such amounts are included in Other Income from Non-Investment Sources on the Consolidated Statements of Operations.
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 5. Related Party Agreements and Transactions – (continued)
Managerial Assistance
As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. With regard to the Control Investments in Texas Westchester Financial, LLC, New Media West, LLC, TransAmerican Asset Servicing Group, LLC, Takoda Resources Inc., and The Finance Company, LLC, the Company has provided managerial assistance during the period for which no fees were charged. Our Chairman, John Stuart, currently serves as a director of The Finance Company, LLC, New Media West, LLC and Takoda Resources Inc. Lawrence Chua, a Senior Vice President of Full Circle Advisors, serves on the board of Takoda Resources Inc.
Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances
Equity offerings are included in the Company’s capital accounts on the date that the Company assumes the obligation to issue the shares. For purposes of the calculation of Net Asset Value Per Share, Earnings Per Share and Per Share Data, the related shares are treated as outstanding on the same date that the equity offering is included in the Company’s capital accounts.
Offering expenses are generally charged against paid-in capital in excess of par. The proceeds raised, the related underwriting fees, the offering expenses, and the price at which common stock was issued, since inception, are detailed in the following table:
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Issuances of Common Stock | | Number of Shares Issued | | Gross Proceeds Raised, Net Assets Acquired and Dividends Reinvested | | Underwriting Fees | | Offering Expenses | | Gross Offering Price |
April 16, 2010 | | | 100 | | | $ | 1,500 | | | $ | — | | | $ | — | | | $ | 15.00 per/share | |
August 31, 2010 | | | 4,191,415 | (1) | | $ | 42,425,564 | | | $ | — | | | $ | — | | | $ | 10.13 per/share | (2) |
August 31, 2010 | | | 2,000,000 | | | $ | 18,000,000 | | | $ | 1,350,000 | | | $ | 1,052,067 | | | $ | 9.00 per/share | |
November 27, 2012 | | | 1,350,000 | | | $ | 10,665,000 | | | $ | 533,250 | | | $ | 153,330 | | | $ | 7.90 per/share | |
January 14, 2014 | | | 1,892,300 | (3) | | $ | 13,492,099 | | | $ | 539,684 | | | $ | 261,994 | | | $ | 7.13 per/share | |
February 27, 2014 | | | 630,000 | | | $ | 4,920,300 | | | $ | — | (4) | | $ | 47,236 | | | $ | 7.81 per/share | |
June 19, 2014 | | | 1,351,352 | | | $ | 10,000,005 | | | $ | — | (4) | | $ | 44,826 | | | $ | 7.40 per/share | |
July 14, 2014 | | | 506,000 | | | $ | 3,744,400 | | | $ | — | (4) | | $ | 37,775 | | | $ | 7.40 per/share | |
March 30, 2015 | | | 11,205,921 | | | $ | 39,220,723 | | | $ | 952,214 | (5) | | $ | 449,446 | | | $ | 3.50 per/share | |
April 13, 2015 | | | 80,475 | | | $ | 281,663 | | | $ | — | | | $ | 3,345 | | | $ | 3.50 per/share | |
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| (1) | Includes 403,662 shares that were issued on September 30, 2010 upon the expiration of the overallotment option granted to the underwriters in connection with our initial public offering. Such shares were deemed to be outstanding at August 31, 2010. |
| (2) | Based on weighted average price assigned to shares. |
| (3) | Includes 242,300 overallotment shares that were granted to the underwriters in connection with our January 14, 2014 follow-on offering. The underwriters exercised their option to purchase additional shares on January 27, 2014. Such shares were deemed to be outstanding at January 14, 2014. |
| (4) | This was a registered offering placed directly with investors. |
| (5) | Shares were issued pursuant to a rights offering. The dealer manager received $952,214 for services provided in connection with the rights offering. |
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances – (continued)
On August 26, 2015, the Board of Directors authorized the purchase of an additional 1 million shares to provide for the purchase of up to 2 million shares of the outstanding common stock as part of the share repurchase program. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act. The number of shares repurchased, the repurchase price, cost and weighted average discount per share is summarized in the following table:
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Repurchase of Common Stock | | Number of Shares Repurchased | | Average Repurchase Price | | Total Cost | | Weighted Average Discount Per Share |
Quarter Ended September 30, 2015 | | | 472,407 | | | $ | 3.19 per/share | | | $ | 1,504,819 | | | | 25.9 | %(1) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | The average discount rate per share, based upon the Net Asset Value per share at June 30, 2015, is weighted based upon the total shares repurchased during the period. |
As of November 9, 2015, the Company has repurchased an aggregate of 763,187 shares under the share repurchase program at the weighted average price of $3.17 per share, resulting in $2.4 million of cash paid, under the program.
Note 7. Financial Highlights
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| | Three months ended September 30, 2015 | | Three months ended September 30, 2014 |
| | (Unaudited) | | (Unaudited) |
Per Share Data(1):
| | | | | | | | |
Net asset value at beginning of period | | $ | 4.30 | | | $ | 6.38 | |
Accretion (dilution) from offering(s)(3) | | | — | | | | 0.04 | |
Accretion from share repurchases(4) | | | 0.02 | | | | — | |
Offering costs | | | — | | | | (0.00 | ) |
Net investment income (loss)(9) | | | 0.11 | | | | 0.16 | |
Net change in unrealized gain (loss) | | | (0.33 | ) | | | (0.17 | ) |
Net realized gain (loss) | | | 0.01 | | | | 0.03 | |
Dividends from net investment income | | | (0.11 | ) | | | (0.16 | ) |
Return of capital | | | — | | | | (0.04 | ) |
Net asset value at end of period | | $ | 4.00 | | | $ | 6.24 | |
Per share market value at end of period | | $ | 3.07 | | | $ | 6.39 | |
Total return based on market value | | | (11.14 | )%(6) | | | (15.62 | )%(6) |
Total return based on net asset value | | | (3.88 | )%(6) | | | 0.87 | %(6) |
Shares outstanding at end of period | | | 22,763,023 | | | | 11,949,034 | |
Weighted average shares outstanding for period | | | 23,175,342 | | | | 11,877,534 | |
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 7. Financial Highlights – (continued)
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| | Three months ended September 30, 2015 | | Three months ended September 30, 2014 |
| | (Unaudited) | | (Unaudited) |
Ratio/Supplemental Data:
| | | | | | | | |
Net assets at end of period | | $ | 91,101,826 | | | $ | 74,537,373 | |
Average net assets | | $ | 99,526,389 | | | $ | 76,016,697 | |
Annualized ratio of gross operating expenses to average net assets(7) | | | 11.22 | % | | | 13.19 | % |
Annualized ratio of net operating expenses to average net assets(7) | | | 9.23 | % | | | 11.34 | % |
Annualized ratio of net investment income (loss) to average net assets(7) | | | 9.66 | % | | | 9.99 | % |
Annualized ratio of net operating expenses excluding management fees (net of waiver), incentive fees, and interest expense to average net assets(7) | | | 1.76 | % | | | 1.46 | % |
Portfolio Turnover(8) | | | 20 | % | | | 22 | % |
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| | Year Ended June 30, 2015 | | Year Ended June 30, 2014 | | Year Ended June 30, 2013 | | Year Ended June 30, 2012 | | For the period from August 31, 2010 (commencement of operations) to June 30, 2011 |
Per Share Data(1)(2):
| | | | | | | | | | | | | | | | | | | | |
Net asset value at beginning of period | | $ | 6.38 | | | $ | 8.01 | | | $ | 8.59 | | | $ | 9.08 | | | $ | 9.40 | |
Accretion (dilution) from offering(s)(3) | | | (0.92 | ) | | | 0.03 | | | | (0.18 | ) | | | — | | | | — | |
Offering costs | | | (0.06 | ) | | | (0.04 | ) | | | (0.02 | ) | | | — | | | | (0.04 | ) |
Net investment income (loss)(9) | | | 0.63 | | | | 0.71 | | | | 0.77 | | | | 0.78 | | | | 0.70 | |
Net change in unrealized gain (loss) | | | (0.51 | ) | | | (1.36 | ) | | | 0.37 | | | | (0.32 | ) | | | (0.29 | ) |
Net realized gain (loss) | | | (0.51 | ) | | | (0.11 | ) | | | (0.60 | ) | | | (0.03 | ) | | | 0.06 | |
Dividends from net investment income | | | (0.63 | ) | | | (0.69 | ) | | | (0.78 | ) | | | (0.80 | ) | | | (0.75 | ) |
Return of capital | | | (0.08 | ) | | | (0.17 | ) | | | (0.14 | ) | | | (0.12 | ) | | | — | |
Net asset value at end of period | | $ | 4.30 | | | $ | 6.38 | | | $ | 8.01 | | | $ | 8.59 | | | $ | 9.08 | |
Per share market value at end of period | | $ | 3.57 | | | $ | 7.81 | | | $ | 7.83 | | | $ | 7.65 | | | $ | 7.90 | |
Total return based on market value | | | (46.78 | )%(6) | | | 11.51 | %(6) | | | 15.12 | %(6) | | | 8.71 | %(6) | | | (4.03 | )%(5) |
Total return based on net asset value | | | (21.53 | )%(6) | | | (11.00 | )%(6) | | | 4.94 | %(6) | | | 6.20 | %(6) | | | 5.62 | %(5) |
Shares outstanding at end of period | | | 23,235,430 | | | | 11,443,034 | | | | 7,569,382 | | | | 6,219,382 | | | | 6,219,382 | |
Weighted average shares outstanding for period | | | 14,803,637 | | | | 8,698,814 | | | | 7,018,286 | | | | 6,219,382 | | | | 6,206,824 | |
Ratio/Supplemental Data:
| | | | | | | | | | | | | | | | | | | | |
Net assets at end of period | | $ | 99,938,567 | | | $ | 72,980,277 | | | $ | 60,644,039 | | | $ | 53,442,785 | | | $ | 56,474,006 | |
Average net assets | | $ | 78,137,174 | | | $ | 64,360,541 | | | $ | 57,842,601 | | | $ | 55,531,518 | | | $ | 57,455,987 | |
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 7. Financial Highlights – (continued)
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| | Year Ended June 30, 2015 | | Year Ended June 30, 2014 | | Year Ended June 30, 2013 | | Year Ended June 30, 2012 | | For the period from August 31, 2010 (commencement of operations) to June 30, 2011 |
Annualized ratio of gross operating expenses to average net assets(7) | | | 13.51 | % | | | 12.11 | % | | | 11.52 | % | | | 9.56 | % | | | 8.49 | % |
Annualized ratio of net operating expenses to average net assets(7) | | | 11.69 | % | | | 12.11 | % | | | 11.52 | % | | | 8.99 | % | | | 7.34 | % |
Annualized ratio of net investment income (loss) to average net assets(7) | | | 11.02 | % | | | 9.37 | % | | | 9.30 | % | | | 8.70 | % | | | 9.29 | % |
Annualized ratio of net operating expenses excluding management fees (net of waiver), incentive fees, and interest expense to average net assets(7) | | | 1.51 | % | | | 3.04 | % | | | 3.53 | % | | | 3.15 | % | | | 2.00 | % |
Portfolio Turnover(8) | | | 74 | % | | | 88 | %(10) | | | 73 | %(10) | | | 58 | %(10) | | | 54 | %(10) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Financial highlights are based on weighted average shares outstanding. |
| (2) | Financial highlights for the period from April 16, 2010 (inception) through June 30, 2010 are not presented as the Company’s operations were limited to organization and offering activities only. |
| (3) | Accretion and dilution from offering(s) is based on the net change in net asset value from each follow-on offering. |
| (4) | Accretion from share repurchases during the period is based on the net change in net asset value from the share repurchases. |
| (5) | Total return based on market value is based on the change in market price per share assuming an investment at the initial public offering price of $9.00 per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in the period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. The total returns are not annualized. |
| (6) | Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in the period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. The total returns are not annualized. |
| (7) | Financial Highlights for periods of less than one year are annualized and the ratios of gross and net operating expenses to average net assets and net investment income (loss) to average net assets are adjusted accordingly. Non-recurring expenses were not annualized. For the period from August 31, 2010 (commencement of operations) to June 30, 2011 the Company incurred $102,609 of organizational expenses, which were deemed to be non-recurring. |
| (8) | Portfolio Turnover is not annualized. |
| (9) | Net investment income (loss) per share is calculating based on the beginning of year and end of year shares outstanding. |
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NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 8. Long Term Liabilities
Line of Credit
On June 3, 2013, the Company entered into a credit facility (the “Credit Facility”) with Santander Bank. The facility size was originally $32.5 million and replaced the Company’s First Capital Credit Facility. The Credit Facility was subsequently increased to $45.0 million on November 6, 2013. On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank, N.A. to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company has not exercised its option to expand the facility as of September 30, 2015.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (one month, two month or three month, depending on the Company’s option) plus 3.25% to 4.00% per annum, or from Santander Bank’s prime rate plus 1.25% to 2.00% per annum, based on the Company’s election. As of September 30, 2015, one month LIBOR, two month LIBOR, and three month LIBOR respectively were: 0.20%, 0.26%, and 0.33%. As of September 30, 2015, the Prime Rate was 3.25%. In addition, a fee of 0.50% to 1.00% per annum, depending on utilization, is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Company’s assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.
The fees and expenses associated with opening and expanding the Credit Facility are being amortized over the term of the Credit Facility in accordance with ASC 470, Debt. As of September 30, 2015, of the total $763,984 fees and expenses incurred, $195,040 remains to be amortized and is reflected as Deferred Credit Facility Fees on the Consolidated Statements of Assets and Liabilities.
At September 30, 2015 and June 30, 2015, the Company had outstanding borrowings of $9,033,258 and $0, respectively, under the Credit Facility, which amounts are included as Line of Credit in the Consolidated Statements of Assets and Liabilities.
Notes Payable
On June 28, 2013, the Company issued $21,145,525 in aggregate principal amount of 8.25% Notes due June 30, 2020 (the “Notes”) (including a partial exercise of the underwriters’ overallotment option in July 2013) for net proceeds of $20,038,250 after deducting underwriting commissions of approximately $860,822 and offering expenses of $246,453.
On July 14, 2014, we closed an offering of our 8.25% fixed-rate notes due 2020. The Notes offering consisted of $12,500,000 in aggregate principal amount of the Notes. The Notes were sold at price of $25.375 plus accrued interest from June 30, 2014, a premium to par value of $25.00 per Note. The sale of the notes resulted in total gross proceeds of $12,687,500. The Notes are a further issuance of, rank equally in right of payment with, and form a single series with the $21,145,525 of currently outstanding Notes.
The offering expenses and underwriting commissions are being amortized over the term of the notes in accordance with ASC 470, Debt. Additionally, in accordance with ASU 2015-03, debt issuance costs related to the Notes are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction from the face amount of the Notes. As such, as of September 30, 2015, of the total $1,150,940 issuance costs incurred, $793,700 remains to be amortized and is included in, and offsets, the Notes Payable balance in the Consolidated Statements of Assets and Liabilities. Additionally, $152,721 of the $187,500 premium related to the July 14, 2014 issuance remains unamortized and is included in the Notes Payable balance in the Consolidated Statements of Assets and Liabilities.
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 8. Long Term Liabilities – (continued)
As of June 30, 2015, of the total $1,150,940 issuance costs incurred, $833,541 remained to be amortized and is included in, and offsets, the Notes Payable balance in the Consolidated Statements of Assets and Liabilities. Additionally, $158,504 of the $187,500 premium related to the July 14, 2014 issuance remained unamortized and is included in the Notes Payable balance in the Consolidated Statements of Assets and Liabilities.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the “Indenture”), between the Company and U.S. Bank National Association (the “Trustee”). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a fixed rate of 8.25% per annum, beginning September 30, 2013. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol “FULLL” with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 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 Company may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of September 30, 2015, the Company had not repurchased any of the Notes in the open market.
At September 30, 2015 and June 30, 2015, the Company had a balance of $33,645,525 on the Notes, which is included in Notes Payable in the Consolidated Statements of Assets and Liabilities.
The following shows a summary of the Long Term Liabilities as of September 30, 2015 and June 30, 2015:
As of September 30, 2015 (Unaudited)
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
Facility | | Commitments | | Borrowings Outstanding | | Fair Value |
Credit Facility(1) | | $ | 45,000,000 | | | $ | 9,033,258 | | | $ | 9,033,258 | |
Notes | | | 33,645,525 | | | | 33,645,525 | | | | 34,453,018 | |
Total | | $ | 78,645,525 | | | $ | 42,678,783 | | | $ | 43,486,276 | |
33
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 8. Long Term Liabilities – (continued)
As of June 30, 2015
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
Facility | | Commitments | | Borrowings Outstanding | | Fair Value |
Credit Facility(1) | | $ | 45,000,000 | | | $ | — | | | $ | — | |
Notes | | | 33,645,525 | | | | 33,645,525 | | | | 34,049,271 | |
Total | | $ | 78,645,525 | | | $ | 33,645,525 | | | $ | 34,049,271 | |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank, N.A. to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company has not exercised its option to expand the facility as of September 30, 2015. |
As of September 30, 2015 and June 30, 2015, the carrying amount of the Company’s outstanding Credit Facility approximated fair value. The fair values of the Company’s Credit Facility and 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.
Note 9. Fair Value Measurements
The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). See Note 2 for a discussion of the Company’s policies.
The following table presents information about the Company’s assets measured at fair value as of September 30, 2015 and June 30, 2015, respectively:
As of September 30, 2015 (Unaudited)
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets
| | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | — | | | $ | 10,270,000 | | | $ | 115,092,339 | | | $ | 125,362,339 | |
Limited Liability Company Interests, at fair value | | | — | | | | — | | | | 3,149,527 | | | | 3,149,527 | |
Investments in Warrants, at fair value | | | — | | | | — | | | | 230,844 | | | | 230,844 | |
Common Stock, at fair value | | | 563,704 | | | | — | | | | 12,750,000 | | | | 13,313,704 | |
Open Swap Contract, at fair value | | | — | | | | — | | | | 225,000 | | | | 225,000 | |
| | $ | 563,704 | | | $ | 10,270,000 | | | $ | 131,447,710 | | | $ | 142,281,414 | |
As of June 30, 2015
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets
| | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | — | | | $ | 12,275,000 | | | $ | 121,630,798 | | | $ | 133,905,798 | |
Limited Liability Company Interests, at fair value | | | — | | | | — | | | | 1,228,978 | | | | 1,228,978 | |
Investments in Warrants, at fair value | | | — | | | | 90 | | | | 2,695,075 | | | | 2,695,165 | |
Common Stock, at fair value | | | 1,308,818 | | | | — | | | | 12,975,000 | | | | 14,283,818 | |
Open Swap Contract, at fair value | | | — | | | | — | | | | — | | | | — | |
| | $ | 1,308,818 | | | $ | 12,275,090 | | | $ | 138,529,851 | | | $ | 152,113,759 | |
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 9. Fair Value Measurements – (continued)
During the three months ended September 30, 2015, there were no transfers in or out of levels. During the year ended June 30, 2015, a portion of the Level 3 General Cannabis Corp. warrant was converted into Level 1 common stock.
The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the net unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The tables below reflect the changes in Level 3 assets measured at fair value for the three months ended September 30, 2015, the three months ended September 30, 2014 and for the year ended June 30, 2015.
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Three Months Ended September 30, 2015 (Unaudited) |
| | Beginning Balance July 1, 2015 | | Amortization & Accretion of Fixed Income Premiums & Discounts | | Realized & Unrealized Gains (Losses) | | Purchases(1) | | Sales & Settlements | | Ending Balance September 30, 2015 | | Change in Unrealized Gains (Losses) for Investments still held at September 30, 2015 |
Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | 121,630,798 | | | $ | 455,578 | | | $ | (3,323,556 | ) | | $ | 28,743,423 | | | $ | (32,413,904 | ) | | $ | 115,092,339 | | | $ | (2,925,318 | ) |
Limited Liability Company Interests, at fair value | | | 1,228,978 | | | | — | | | | 1,950,549 | | | | — | | | | (30,000 | ) | | | 3,149,527 | | | | 2,003,654 | |
Warrants, at fair value | | | 2,695,075 | | | | — | | | | (2,464,231 | ) | | | — | | | | — | | | | 230,844 | | | | (2,464,231 | ) |
Common Stock, at fair value | | | 12,975,000 | | | | — | | | | (225,000 | ) | | | — | | | | — | | | | 12,750,000 | | | | (225,000 | ) |
Open Swap Contract, at fair value | | | — | | | | — | | | | 324,656 | | | | — | | | | (99,656 | ) | | | 225,000 | | | | 225,000 | |
| | $ | 138,529,851 | | | $ | 455,578 | | | $ | (3,737,582 | ) | | $ | 28,743,423 | | | $ | (32,543,560 | ) | | $ | 131,447,710 | | | $ | (3,385,895 | ) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Includes PIK interest. |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Three Months Ended September 30, 2014 (Unaudited) |
| | Beginning Balance July 1, 2014 | | Amortization & Accretion of Fixed Income Premiums & Discounts | | Realized & Unrealized Gains (Losses) | | Purchases(1) | | Sales & Settlements | | Ending Balance September 30, 2014 | | Change in Unrealized Gains (Losses) for Investments still held at September 30, 2014 |
Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | 111,079,608 | | | $ | 171,294 | | | $ | 899,805 | | | $ | 30,250,399 | | | $ | (28,691,798 | ) | | $ | 113,709,308 | | | $ | 628,309 | |
Limited Liability Company Interests, at fair value | | | 3,875,583 | | | | — | | | | (1,546,085 | ) | | | — | | | | — | | | | 2,329,498 | | | | (1,546,085 | ) |
Warrants, at fair value | | | 3,060,421 | | | | — | | | | (681,725 | ) | | | 2,289,400 | | | | — | | | | 4,668,096 | | | | (681,726 | ) |
| | $ | 118,015,612 | | | $ | 171,294 | | | $ | (1,328,005 | ) | | $ | 32,539,799 | | | $ | (28,691,798 | ) | | $ | 120,706,902 | | | $ | (1,599,502 | ) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Includes PIK interest. |
35
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 9. Fair Value Measurements – (continued)
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
| | Year Ended June 30, 2015 |
| | Beginning Balance July 1, 2014 | | Amortization & Accretion of Fixed Income Premiums & Discounts | | Realized & Unrealized Gains (Losses) | | Transfers out of Level 3(2) | | Purchases(1) | | Sales & Settlements | | Ending Balance June 30, 2015 | | Change in Unrealized Gains (Losses) for Investments still held at June 30, 2015 |
Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | 111,079,608 | | | $ | 1,371,720 | | | $ | (6,728,531 | ) | | $ | — | | | $ | 113,149,706 | | | $ | (97,241,705 | ) | | $ | 121,630,798 | | | $ | (7,918,295 | ) |
Limited Liability Company Interests, at fair value | | | 3,875,583 | | | | — | | | | (2,474,886 | ) | | | — | | | | — | | | | (171,719 | ) | | | 1,228,978 | | | | (1,171,144 | ) |
Warrants, at fair value | | | 3,060,421 | | | | — | | | | (2,194,114 | ) | | | (486,786 | ) | | | 2,328,768 | | | | (13,214 | ) | | | 2,695,075 | | | | (337,902 | ) |
Common Stock, at fair value | | | — | | | | — | | | | — | | | | | | | | 12,975,000 | | | | — | | | | 12,975,000 | | | | — | |
Open Swap Contract, at fair value | | | — | | | | — | | | | 1,081 | | | | — | | | | — | | | | (1,081 | ) | | | — | | | | — | |
| | $ | 118,015,612 | | | $ | 1,371,720 | | | $ | (11,396,450 | ) | | $ | (486,786 | ) | | $ | 128,453,474 | | | $ | (97,427,719 | ) | | $ | 138,529,851 | | | $ | (9,427,341 | ) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Includes PIK interest. |
| (2) | Represents the transfer of a portion of the General Cannabis Corp. warrant out of Level 3 into Level 1 common stock upon conversion. |
Realized and unrealized gains and losses are included in net realized gain (loss) and net change in unrealized gain (loss) in the Consolidated Statements of Operations. The change in unrealized losses for Level 3 investments still held at September 30, 2015 of $3,385,895 is included in net change in unrealized gain (loss) in the Consolidated Statements of Operations for the three months ended September 30, 2015.
36
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 9. Fair Value Measurements – (continued)
The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2015:
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
Description | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range (Average)(1) |
Senior and Subordinated Loans | | $ | 88,051,036 | | | | Discounted cash flows (income approach) | | | | Discount Rate | | | | 5.94% – 31.38% (13.89%) | |
| | | 23,555,747 | | | | Precedent Transactions | | | | Transaction Value | | | | N/A | |
| | | 3,485,556 | | | | Liquidation Value | | | | Asset Value | | | | N/A | |
Total | | | 115,092,339 | | | | | | | | | | | | | |
Limited Liability Interests, Warrants, and Common Stock (Private Companies) | | | 1,011,871 | | | | Market comparable companies (market approach) | | | | EBITDA multiple | | | | 3.50x – 7.00x (4.62x) | |
| | | 14,950,000 | | | | Precedent Transactions | | | | Transaction Value | | | | N/A | |
| | | 147,500 | | | | Liquidation Value | | | | Asset Value | | | | N/A | |
Total | | | 16,109,371 | | | | | | | | | | | | | |
Warrant (Public Companies) | | | 21,000 | | | | Option Pricing Model | | | | Volatility | | | | 45.925% | |
Open Swap Contract | | | 225,000 | | | | Option Pricing Model | | | | Broker Quotes | | | | $207.50/share – $217.50/share ($212.50/share) | |
Total Level 3 Investments | | $ | 131,447,710 | | | | | | | | | | | | | |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
37
TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 9. Fair Value Measurements – (continued)
The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2015:
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0001144204-15-063715/spacer.gif) |
Description | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range (Average)(1) |
Senior and Subordinated Loans | | $ | 91,569,415 | | | | Discounted cash flows (income approach) | | | | Discount Rate | | | | 8.51% – 55.00% (16.27%) | |
| | | 26,739,621 | | | | Precedent Transactions | | | | Transaction Value | | | | N/A | |
| | | 3,321,762 | | | | Liquidation Value | | | | Asset Value | | | | N/A | |
Total | | | 121,630,798 | | | | | | | | | | | | | |
Limited Liability Interests, Warrants, and Common Stock (Private Companies) | | | 3,719,553 | | | | Market comparable companies (market approach) | | | | EBITDA multiple | | | | 4.00x – 7.25x (5.15x) | |
| | | 12,975,000 | | | | Precedent Transactions | | | | Transaction Value | | | | N/A | |
| | | 177,500 | | | | Liquidation Value | | | | Asset Value | | | | N/A | |
Total | | | 16,872,053 | | | | | | | | | | | | | |
Warrant (Public Companies) | | | 27,000 | | | | Option Pricing Model | | | | Volatility | | | | 32.588% | |
Open Swap Contract | | | — | | | | Option Pricing Model | | | | Broker Quotes | | | | $212.50/share – $220.00/share ($216.50/share) | |
Total Level 3 Investments | | $ | 138,529,851 | | | | | | | | | | | | | |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.
The primary significant unobservable input used in the fair value measurement of the Company’s private equity and warrant investments is the EBITDA multiple, which is used to determine the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.
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TABLE OF CONTENTS
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 9. Fair Value Measurements – (continued)
The primary unobservable inputs used in the fair value measurement of the Company’s warrant investments, when using an option pricing model, are the discount rate and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of a warrant using an option pricing model.
Note 10. Derivative Financial Instruments
In the normal course of business, the Company may utilize derivative contracts in connection with its investment activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The derivative activities and exposure to derivative contracts primarily involve equity price risks. In addition to the primary underlying risk, additional counterparty risk exists due to the potential inability of counterparties to meet the terms of their contracts.
Warrants
The warrants provide exposure and potential gains upon equity appreciation of the portfolio company’s equity value.
The value of a warrant has two components: time value and intrinsic value. A warrant has a limited life and expires on a certain date. As a warrant’s expiration date approaches, the time value of the warrant will decline. In addition, if the stock underlying the warrant declines in price, the intrinsic value of an “in the money” warrant will decline. Further, if the price of the stock underlying the warrant does not exceed the strike price of the warrant on the expiration date, the warrant will expire worthless. As a result, there is the potential for the entire value of an investment in a warrant to be lost.
Counterparty risk exists from the potential failure of an issuer of warrants to settle its exercised warrants. The maximum risk of loss from counterparty risk is the fair value of the contracts and the purchase price of the warrants. The Company’s Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.
Swap contracts — general
The Company may enter into swap contracts, including interest rate swaps, total return swaps, and credit default swaps, as part of its investment strategy, to hedge against unfavorable changes in the value of investments and to protect against adverse movements in interest rates or credit performance with counterparties. Generally, a swap contract is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified prices or rates for a specified notional amount of the underlying assets. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Payments are disclosed as realized gain (loss) on open swap contracts on the Consolidated Statements of Operations. If the payment is a receivable as of the end of the period, it is disclosed as receivable on open swap contract on the Consolidated Statements of Assets and Liabilities.
The fair value of open swaps reported in the Consolidated Statements of Assets and Liabilities may differ from that which would be realized in the event the Company terminated its position in the contract. Risks may arise as a result of the failure of the counterparty to the swap contract to comply with the terms of the swap contract. The loss incurred by the failure of counterparty is generally limited to the aggregate fair value of swap contracts in an unrealized gain position, as adjusted for any collateral posted to us by the counterparty or by us with the counterparty. Therefore, the Company considers the creditworthiness of each counterparty to a swap contract in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in the fair value of the underlying investments.
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Note 10. Derivative Financial Instruments – (continued)
Total return swaps
The Company is subject to market risk in the normal course of pursuing its investment objectives. The Company may enter into total return swaps either to manage its exposure to the market or certain sectors of the market, or to create exposure to certain investments to which it is otherwise not exposed.
Total return swap contracts involve the exchange by the Company and a counterparty of their respective commitments to pay or receive a net amount based on the change in the fair value of a particular security or index and a specified notional amount.
During the year ended June 30, 2015, we funded one synthetic secured loan in the form of a total return swap. More specifically, we purchased 60,000 shares of Granite Ridge Holdings, LLC, a power generation company. We contemporaneously entered into a collateralized swap agreement with another private fund, which posted approximately $10.4 million of cash collateral, whereby we swapped the returns on the shares for a fixed rate of 15.0% on the net loan amount. Under the terms of the swap, the Company expects to receive periodic payments from the counterparty. These periodic payments will be recorded as realized capital gains for accounting purposes in accordance with GAAP. For the three months ended September 30, 2015, $99,656 of realized gain related to the open swap contract was included on the Consolidated Statement of Operations. For the year ended June 30, 2015, $1,081 of realized gain related to the open swap contract was included in the Consolidated Statement of Operations.
Note 11. Subsequent Events
Recent Portfolio Activity
On October 30, 2015, the Company sold its equity interest in West World Media, LLC for total proceeds of $2.2 million.
On October 30, 2015, the senior secured revolving loan with TransAmerican Asset Servicing Group, LLC was repaid with total proceeds of approximately $0.5 million.
Distributions
On November 3, 2015, the Board of Directors declared the following monthly distributions:
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Record Date | | Payment Date | | Per Share Amount |
January 29, 2016 | | | February 15, 2016 | | | $ | 0.035 | |
February 29, 2016 | | | March 15, 2016 | | | $ | 0.035 | |
March 31, 2016 | | | April 15, 2016 | | | $ | 0.035 | |
Note 12. 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, 2015, we had approximately $1.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Schedule 12-14
The table below represents the fair value of control and affiliate investments at June 30, 2015 and any amortization, purchases, sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of September 30, 2015.
Schedule of Investments in and Advances to Affiliates
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Portfolio Company/Type of Investment | | Par Amount/ Quantity | | Amount of Interest and Dividends Credited in Income | | Fair Value at June 30, 2015 | | Accretion/ Amortization | | Purchases | | Sales | | Realized and Unrealized Gains/Losses | | Fair Value at September 30, 2015 |
Control Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Takoda Resources Inc.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Common Stock(1) | | $ | 2,986,718/749 | | | $ | — | | | $ | 161,585 | | | $ | — | | | $ | — | | | $ | (67,814 | ) | | $ | (14,303 | ) | | $ | 79,468 | |
Texas Westchester Financial, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited Liability Company Interests(1) | | | 9,278 | | | | — | | | | 177,500 | | | | — | | | | — | | | | (30,000 | ) | | | — | | | | 147,500 | |
The Finance Company, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests | | $ | 4,195,915/50 | | | | 189,428 | | | | 5,006,194 | | | | 7,938 | | | | — | | | | — | | | | (96,332 | ) | | | 4,917,800 | |
TransAmerican Asset Servicing Group, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(1) | | $ | 3,658,818/75 | | | | — | | | | 466,785 | | | | — | | | | 234,707 | | | | (139,136 | ) | | | (16,956 | ) | | | 545,400 | |
Total Control Investments | | | | | | $ | 189,428 | | | $ | 5,812,064 | | | $ | 7,938 | | | $ | 234,707 | | | $ | (236,950 | ) | | $ | (127,591 | ) | | $ | 5,690,168 | |
Affiliate Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Modular Process Control, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Warrant(1) | | $ | 7,291,977/1 | | | | 287,797 | | | | 3,663,827 | | | | 17,276 | | | | 696,211 | | | | (555,262 | ) | | | (3,124,572 | ) | | | 697,480 | |
ProGrade Ammo Group, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt(1)/Warrants(1) | | $ | 6,711,164/181,240 | | | | — | | | | 2,590,309 | | | | — | | | | 45,967 | | | | — | | | | (473,068 | ) | | | 2,163,208 | |
SOLEX Fine Foods, LLC; Catsmo, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(1)/Warrant(1) | | $ | 3,861,696/1/1 | | | | 128,151 | | | | 3,832,347 | | | | 6,404 | | | | — | | | | — | | | | (35,366 | ) | | | 3,803,385 | |
US Oilfield Company, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Warrants(1) | | $ | 6,268,740/5 | | | | 198,510 | | | | 5,683,338 | | | | 4,167 | | | | 3,498,155 | | | | (3,003,671 | ) | | | (1,527,082 | ) | | | 4,654,907 | |
West World Media, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited Liability Company Interests(1) | | | 148,326 | | | | — | | | | 249,451 | | | | — | | | | — | | | | — | | | | 1,950,549 | | | | 2,200,000 | |
Total Affiliate Investments | | | | | | $ | 614,458 | | | $ | 16,019,272 | | | $ | 27,847 | | | $ | 4,240,333 | | | $ | (3,558,933 | ) | | $ | (3,209,539 | ) | | $ | 13,518,980 | |
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| (1) | Nonincome-producing security. |
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
Schedule 12-14
The table below represents the fair value of control and affiliate investments at June 30, 2014 and any amortization, purchases, sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of June 30, 2015.
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Portfolio Company/Type of Investment | | Par Amount/ Quantity | | Amount of Interest and Dividends Credited in Income | | Fair Value at June 30, 2014 | | Accretion/ Amortization | | Purchases | | Sales | | Realized and Unrealized Gains/Losses | | Transfer from Control to Non-Control/ Non-Affiliate Investment | | Fair Value at June 30, 2015 |
Control Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
New Media West, LLC(2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(4) | | $ | 3,811,681 | | | $ | 318,461 | | | $ | 5,666,679 | | | $ | — | | | $ | — | | | $ | (1,015,030 | ) | | $ | (4,651,649 | ) | | $ | — | | | $ | — | |
Takoda Resources Inc.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Common Stock(1) | | $ | 3,054,532/749 | | | | 118,703 | | | | 2,557,379 | | | | — | | | | 453,272 | | | | (91,568 | ) | | | (2,757,498 | ) | | | — | | | | 161,585 | |
Texas Westchester Financial, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited Liability Company Interests(1) | | | 9,278 | | | | — | | | | 540,037 | | | | — | | | | — | | | | (171,717 | ) | | | (190,820 | ) | | | — | | | | 177,500 | |
The Finance Company, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(1) | | $ | 4,195,915/50 | | | | 881,110 | | | | 7,214,905 | | | | 38,386 | | | | — | | | | (967,632 | ) | | | (1,279,465 | ) | | | — | | | | 5,006,194 | |
TransAmerican Asset Servicing Group, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(1) | | $ | 3,563,246/75 | | | | 183,042 | | | | 1,560,057 | | | | 9,714 | | | | 1,532,467 | | | | (977,374 | ) | | | (1,658,079 | ) | | | — | | | | 466,785 | |
Total Control Investments | | | | | | $ | 1,501,316 | | | $ | 17,539,057 | | | $ | 48,100 | | | $ | 1,985,739 | | | $ | (3,223,321 | ) | | $ | (10,537,511 | ) | | $ | — | | | $ | 5,812,064 | |
Affiliate Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General Cannabis Corp.(3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common Stock/Warrant(1),(4) | | | 654,409 | | | | — | | | | 2,356,212 | | | | — | | | | 113,214 | | | | (377,639 | ) | | | (600,986 | ) | | | (1,490,801 | ) | | | — | |
Modular Process Control, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Warrant(1) | | $ | 7,151,027/1 | | | | 1,205,914 | | | | 3,971,110 | | | | 99,410 | | | | 2,282,926 | | | | (1,911,704 | ) | | | (777,915 | ) | | | — | | | | 3,663,827 | |
ProGrade Ammo Group, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Warrants(1) | | $ | 6,665,197/ 181,240 | | | | 4,594 | | | | 4,133,284 | | | | 4,594 | | | | 877,441 | | | | (2,305,294 | ) | | | (119,716 | ) | | | — | | | | 2,590,309 | |
SOLEX Fine Foods, LLC; Catsmo, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Limited Liability Company Interests(1)/Warrant(1) | | $ | 3,861,696/1/1 | | | | 512,253 | | | | 3,888,914 | | | | 27,904 | | | | 110,000 | | | | (148,304 | ) | | | (46,167 | ) | | | — | | | | 3,832,347 | |
US Oilfield Company, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Debt/Warrants(1) | | $ | 5,767,417/3 | | | | 722,952 | | | | — | | | | 38,812 | | | | 18,396,291 | | | | (12,714,465 | ) | | | (37,300 | ) | | | — | | | | 5,683,338 | |
West World Media, LLC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited Liability Company Interests(1) | | | 148,326 | | | | — | | | | 238,897 | | | | — | | | | — | | | | — | | | | 10,554 | | | | — | | | | 249,451 | |
Total Affiliate Investments | | | | | | $ | 2,445,713 | | | $ | 14,588,417 | | | $ | 170,720 | | | $ | 21,779,872 | | | $ | (17,457,406 | ) | | $ | (1,571,530 | ) | | $ | (1,490,801 | ) | | $ | 16,019,272 | |
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FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (Unaudited)
September 30, 2015
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Nonincome-producing security. |
| (2) | On June 30, 2015, New Media West, LLC transferred from a Control Investment to a Non-Control/Non-Affiliate Investment. |
| (3) | As of May 13, 2015, General Cannabis Corp. transferred from an Affiliate Investment to a Non-Control/Non-Affiliate Investment. All purchases and sales after May 13, 2015 have been excluded from the purchase and sales columns in the above table. Realized and unrealized gains/losses have been prorated and only the realized and unrealized gains/losses which are attributable to the investment as an Affiliate Investment have been included. |
| (4) | Investment no longer held as of June 30, 2015. |
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Full Circle Capital Corporation, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
| • | our future operating results; |
| • | our business prospects and the prospects of our portfolio companies; |
| • | the impact of investments that we expect to make; |
| • | our contractual arrangements and relationships with third parties; |
| • | the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| • | the ability of our portfolio companies to achieve their objectives; |
| • | our expected financings and investments; |
| • | the adequacy of our cash resources and working capital; and |
| • | the timing of cash flows, if any, from the operations of our portfolio companies. |
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
| • | an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; |
| • | an expiration or contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; |
| • | interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy; |
| • | the risks, uncertainties and other factors we identify in “Risk Factors” in our Annual Report on Form 10-K for the period ended June 30, 2015 and elsewhere in this quarterly report on Form 10-Q and in our filings with the SEC. |
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q.
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Except as otherwise specified, references to “Full Circle Capital,” the “Company,” “we,” “us” and “our” refer to Full Circle Capital Corporation.
Overview
We are an externally managed non-diversified closed-end management investment company formed in April 2010, and have elected to be regulated as a business development company under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors. Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in senior secured loans and, to a lesser extent, second liens loans, mezzanine loans and equity securities issued by lower middle-market and middle-market companies that operate in a diverse range of industries. In our lending activities, we focus primarily on portfolio companies with both (i) tangible and intangible assets available as collateral and security against our loan to help mitigate our risk of loss, and (ii) cash flow to cover debt service. We believe this provides us with a more attractive risk adjusted return profile, with greater principal protection and likelihood of repayment.
Our investments generally range in size from $3 million to $10 million; however, we may make larger or smaller investments from time to time on an opportunistic basis. We focus primarily on senior secured loans and “stretch” senior secured loans, also referred to as “unitranche” loans, which combine characteristics of traditional first-lien senior secured loans and second-lien or subordinated loans. We believe that having a first lien, senior secured position provides us with greater control and security in the primary collateral of a borrower and helps to mitigate risk against loss of principal should a borrower default. Our stretch senior secured loans typically possess a greater advance rate against the borrower’s assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. Stretch senior secured loan instruments can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may invest in mezzanine, subordinated or unsecured loans. In addition, we may acquire equity or equity related interests from a borrower along with our debt investment. We attempt to protect against risk of loss on our debt investments by investing in borrowers with cash flows to cover debt service, while frequently securing our loans against tangible or intangible assets of our borrowers, which may include accounts receivable and contracts for services, and obtaining a favorable loan-to-value ratio, and in many cases, securing other financial protections or credit enhancements, such as personal guarantees from the principals of our borrowers, make well agreements and other forms of collateral, rather than lending predominantly against anticipated cash flows of our borrowers. We believe this allows us more options and greater likelihood of repayment from refinancing, asset sales of our borrowers and/or amortization.
We generally seek to invest in lower middle-market and middle-market companies in areas that we believe have been historically under-serviced, especially during and after the 2008/2009 credit crisis. These areas include industries that are outside the focus of mainstream institutions or investors due to required industry-specific knowledge or are too small to attract interest from larger investment funds or other financial institutions. Because we believe there are fewer banks and specialty finance companies focused on lending to these lower middle-market and middle market companies, we believe we can negotiate more favorable terms on our debt investments in these companies than those that would be available for debt investments in comparable larger, more mainstream borrowers. Such favorable terms may include higher debt yields, lower leverage levels, more significant covenant protection and/or greater equity grants than typical of other transactions. We generally seek to avoid competing directly with other capital providers with respect to specific transactions in order to avoid the less favorable terms we believe are typically associated with such competitive bidding processes.
On June 4, 2014, we formed FC Capital Investment Partners (“FCCIP”), a multiple series private fund, for which we serve as the managing member and investment adviser. FCCIP was formed as a Delaware limited liability company and operates under a limited liability company agreement dated June 13, 2014. FCCIP closed its first series on June 17, 2014, raising approximately $5.6 million in capital from investors. FCCIP closed its second series on September 25, 2014, raising approximately $10.0 million in capital from investors. We may co-invest in certain portfolio investments from time to time with one or more series issued by FCCIP where we determine that the aggregate available investment opportunity exceeds what we believe
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would be appropriate for us to acquire directly, subject to certain conditions. In addition, we expect to receive certain fees or other distributions for FCCIP in connection with the services we provide to each series it may issue. Such fees may include management fees, incentive fees and administration fees and could be offset by expense caps or waivers in the future. During the three months ended September 30, 2015, we recognized $14,682 in net management fee income related to the services performed for FCCIP.
On July 14, 2014, we sold 506,000 shares of our common stock at $7.40 per share in a direct registered offering to certain investors for total gross proceeds of approximately $3.7 million.
On July 14, 2014, we closed an offering of $12,500,000 in aggregate principal amount of our 8.25% fixed-rate notes due 2020 (the “Notes”). The Notes were sold at price of $25.375 per note plus accrued interest from June 30, 2014, a premium to par value of $25.00 per Note, for total gross proceeds of approximately $12.7 million. The Notes are a further issuance of, rank equally in right of payment with, and form a single series with the $21.1 million of currently outstanding Notes that will mature on June 30, 2020, and may be redeemed in whole or in part at any time or from time to time at our option on or after June 30, 2016. The Notes are listed on the NASDAQ Global Market and trade under the trading symbol “FULLL.”
On March 30, 2015, we completed non-transferable rights offering to our stockholders of record as of 5:00 p.m., New York City time, on March 6, 2015. The rights entitled holders of rights to subscribe for an aggregate of up to 11,949,034 shares of our common stock. Our stockholders as of the record date received one right for each share of common stock owned on the record date. The rights entitled the holder to purchase one new share of common stock for every one right held and record date stockholders who fully exercised their rights were entitled to subscribe, subject to certain limitations and pro-rata allocation, for additional shares that remain unsubscribed as a result of any unexercised rights. The subscription price per share was $3.50. The net proceeds from this rights offering, after deducting the fee payable to the dealer managers and offering expenses, were approximately $37.8 million, which we received on April 6, 2015. In connection with this rights offering, the dealer manager received a fee for its financial advisory, marketing and soliciting services equal to a maximum of 4.0% of the subscription price per share for each share issued pursuant to the exercise of rights, including pursuant to the over-subscription privilege. We incurred offering expenses, including the dealer manager fee of $1,401,660, in connection with this rights offering.
As part of the rights offering, an institutional investor committed to purchase approximately 214,000 shares in open market transactions over a seven-day period following the expiration date of the rights offering. The institutional investor agreed to acquire the remainder of the 214,000 shares in a private placement directly from us to the extent such shares were not purchased in open market transactions during such seven-day period. Subsequent to the seven-day period, on April 13, 2015, such investor acquired 80,475 shares, the remainder of its initial commitment of approximately 214,000 shares, in a private placement at $3.50 per share directly from us. We incurred offering expenses of $3,345 in connection with this offering.
Exemptive Relief
On December 4, 2014, we filed an exemptive application with the SEC to permit us to co-invest with funds or entities managed by our investment adviser in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. On September 23, 2015, we received exemptive relief from the SEC to co-invest with investment funds managed by our investment adviser where doing so is consistent with our investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). Under the terms of the relief permitting us to co-invest with other funds managed by our investment adviser, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objectives and strategies. We may co-invest, subject to the conditions included in the exemptive order we received from the SEC, with one or more funds managed by our investment adviser that
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have an investment strategy that is similar to or overlaps our investment strategy. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Basis of Consolidation
Under the 1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to us. Our Consolidated Financial Statements include our accounts and the accounts of Full Circle West, Inc., FC New Media Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC, our only wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Valuation of Investments in Securities at Fair Value — Definition and Hierarchy
In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Board of Directors uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board of Directors. Unobservable inputs reflect the Board of Directors’ assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers or market makers. Debt and equity securities for which market quotations are not readily available or are not considered to be the best estimate of fair value are valued at fair value as determined in good faith by the Board of Directors. Because the Company expects that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Board of Directors in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors and in accordance with GAAP. Due to the inherent uncertainty 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 the differences could be material.
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The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Board of Directors in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
Net realized gain (loss) and net change in unrealized gain (loss) on investments
Net change in unrealized appreciation or depreciation recorded on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.
From time to time, the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized gain (loss) is included on the Consolidated Statements of Operations as a (decrease) increase in the Change in Unrealized Gain (Loss) on Investments.
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Valuation Techniques
Senior and Subordinated Loans
The Company’s portfolio consists primarily of private debt instruments such as senior and subordinated loans. Investments for which market quotations are readily available (“Level 2 Debt”) are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers. For other debt investments (“Level 3 Debt”) market quotations are not available and other techniques are used to determine fair value. The Company considers its Level 3 Debt to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner, the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 Debt, the Board of Directors considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, the financial condition of the borrower, economic conditions, success and prepayment fees and other relevant factors, both qualitative and quantitative. In the event that a Level 3 Debt instrument is not performing, as defined above, the Company’s Board of Directors will evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 Debt instrument.
This evaluation will be updated no less than quarterly for Level 3 Debt instruments, and more frequently for time periods where there are significant changes in the investor base or significant changes in the perceived value of the underlying collateral. The collateral value will be analyzed on an ongoing basis using internal metrics, appraisals, work performed by third-party valuation agents, if applicable, and other data as may be acquired and analyzed by Management and Board of Directors.
Investments in Private Companies
The Company’s Board of Directors determines the fair value of its investments in private companies where no market quotations are readily available (“Level 3 Private Companies”) by incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, and performance multiples, among other factors, including work performed by third-party valuation agents. The Level 3 Private Companies investments can include Limited Liability Company interests, common stock and other equity investments. These nonpublic investments are included in Level 3 of the fair value hierarchy.
Warrants
The Board of Directors ascribes value to warrants based on fair value analyses that may include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
Publicly Traded Common Stock
Publicly traded common stock in an active market (“Level 1 common stock”) is valued based on unadjusted closing prices in active markets for identical Level 1 common stock that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 common stock.
Swap Contracts
Derivative financial instruments such as swap contracts are valued based on discounted cash flow models and option pricing models, as appropriate. Models use observable data to the extent practicable. However, areas such as credit risk (both our own and that of the counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of derivative financial instruments at the valuation date.
The Company’s accounting policy is to not offset fair value amounts recognized for derivative financial instruments. The related assets and liabilities are presented gross in the Consolidated Statements of Assets and Liabilities. Any cash collateral payables or receivables associated with these instruments are not added to or netted against the fair value amounts of the derivative financial instruments.
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All derivative financial instruments are carried in assets when amounts are receivable by the Company and in liabilities when amounts are payable by the Company. During the period a contract is open, changes in the value of the contracts are recognized as unrealized appreciation or depreciation to reflect the fair value of the contract at the reporting date. When the contracts settle, mature, terminate, or are otherwise closed, the Company records realized gains or losses equal to the difference between the proceeds from (or cost of) the close-out of the contracts and the original contract price. Additionally, the Company records realized gains (losses) on open swap contracts when periodic payments are received or made at the end of each measurement period.
Fair Value
The Company’s assets measured at fair value on a recurring basis subject to the requirements of ASC Topic 820 at September 30, 2015 and June 30, 2015 were as follows:
As of September 30, 2015 (Unaudited)
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| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets
| | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | — | | | $ | 10,270,000 | | | $ | 115,092,339 | | | $ | 125,362,339 | |
Limited Liability Company Interests, at fair value | | | — | | | | — | | | | 3,149,527 | | | | 3,149,527 | |
Investments in Warrants, at fair value | | | — | | | | — | | | | 230,844 | | | | 230,844 | |
Common Stock, at fair value | | | 563,704 | | | | — | | | | 12,750,000 | | | | 13,313,704 | |
Open Swap Contract, at fair value | | | — | | | | — | | | | 225,000 | | | | 225,000 | |
| | $ | 563,704 | | | $ | 10,270,000 | | | $ | 131,447,710 | | | $ | 142,281,414 | |
As of June 30, 2015
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| | Level 1 | | Level 2 | | Level 3 | | Total |
Assets
| | | | | | | | | | | | | | | | |
Senior and Subordinated Loans, at fair value | | $ | — | | | $ | 12,275,000 | | | $ | 121,630,798 | | | $ | 133,905,798 | |
Limited Liability Company Interests, at fair value | | | — | | | | — | | | | 1,228,978 | | | | 1,228,978 | |
Investments in Warrants, at fair value | | | — | | | | 90 | | | | 2,695,075 | | | | 2,695,165 | |
Common Stock, at fair value | | | 1,308,818 | | | | — | | | | 12,975,000 | | | | 14,283,818 | |
Open Swap Contract, at fair value | | | — | | | | — | | | | — | | | | — | |
| | $ | 1,308,818 | | | $ | 12,275,090 | | | $ | 138,529,851 | | | $ | 152,113,759 | |
During the three months ended September 30, 2015, there were no transfers in or out of levels. During the year ended June 30, 2015, a portion of the Level 3 General Cannabis Corp. (formerly known as Advanced Cannabis Solutions, Inc.) warrant was converted into Level 1 common stock.
Revenue Recognition
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with senior and subordinated secured loans are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a senior or subordinated secured loan, any unamortized loan origination, closing and/or commitment fees are recorded as interest income. Generally, when a payment default occurs on a loan in the portfolio, or if the Company otherwise believes that the issuer of the loan will not be able to make contractual interest payments,
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the Company may place the loan on non-accrual status and cease recognizing interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient collateral value and is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in, or sale of the business, the sale of the assets of the business, or some portion or combination thereof.
Dividend income is recorded on the ex-dividend date.
Structuring fees, excess deal deposits, prepayment fees and similar fees are recognized as Other Income from Investments as earned, usually when paid. Other fee income, including annual fees and monitoring fees are included in Other Income from Investments. Management fee income is included in Other Income from Non-Investment Sources.
Use of Estimates
The preparation of our Consolidated Financial Statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts disclosed in the Consolidated Financial Statements of Full Circle Capital. Actual results could differ from those estimates.
Current Market Conditions and Market Opportunity
We believe that the current credit environment provides favorable opportunities to achieve attractive risk-adjusted returns on the types of senior secured loans and other investments we may target. In particular, we believe that, despite an overall fall off in loan demand due to the depressed economic conditions, demand for financing from lower middle-market and middle-market companies is largely outpacing the availability of lenders that have traditionally served this market. We believe that bank consolidations, the failure of a number of alternative lending vehicles due to poor underwriting practices and an overall tightening of underwriting standards has significantly reduced the number and activity level of potential lenders.
We believe there has long been a combination of demand for capital and an underserved market for capital addressing lower middle-market and middle-market borrowers. We believe there is robust demand for continued growth capital as well as demand from very significant refinancing requirements of many borrowers as debt facilities come due, given the lack of willing and qualified capital providers. We believe these market conditions have been further exacerbated in the current environment due to:
| º | larger lenders exiting this market to focus on larger investment opportunities that are more appropriate for their operating cost structures; |
| º | the elimination of many specialized lenders from the market due to lack of capital as a result of, for instance, the closing off of the securitization market or their own poor performance, and |
| º | the need for certain capital providers to reduce lending activities due to their reduced access to capital and the overall deleveraging of the financial market. |
With the decreased availability of debt capital for lower middle-market and middle-market borrowers, combined with the significant demand for refinancing, we believe there are increased lending opportunities for us. As always, we remain cautious in selecting new investment opportunities, and will only deploy capital in deals which are consistent with our disciplined philosophy of pursuing superior risk-adjusted returns.
Operating Expense Reimbursement
Our investment adviser has agreed to reimburse us for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses that exceed 1.50% of our net assets, beginning with our fiscal quarter ending September 30, 2014 through June 30, 2015. For our fiscal year 2016 and beyond, our investment adviser has agreed to reimburse us for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, that exceed 1.75% of our net assets. Our investment adviser reimbursed us $275,156 for the three months ended September 30, 2015.
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Management Fee and Incentive Fee Waiver
For the periods commencing on April 1, 2015 and ending on June 30, 2015 and commencing on July 1, 2015 and ending on June 30, 2016, Full Circle Advisors has agreed to waive the portion of the base management fees and incentive fees that Full Circle Advisors would otherwise be entitled to receive pursuant to our Investment Advisory Agreement to the extent required in order for us to earn net investment income sufficient to support the distribution payment on the shares of our common stock outstanding on the relevant record date for each monthly distribution as then declared by our board of directors. The determination of the amount to be waived will be finalized as of the end of the fiscal year for each period, with such amounts being accrued on a quarterly basis. Net investment income is defined as net income before net realized gains (losses) and unrealized appreciation (depreciation), in each case, as determined in accordance with GAAP. Full Circle Advisors will not be entitled to recoup any amount of base management fees that it waives pursuant to this agreement. There can be no assurance that Full Circle Advisors will extend the waiver beyond June 30, 2016. For the three months ended September 30, 2015, we incurred $611,929 of base management fees, of which $221,953 was waived.
Portfolio Composition and Investment Activity
Our portfolio of investments consists primarily of senior secured loans and, to a lesser extent, second lien loans, mezzanine loans and equity securities issued by lower middle-market and middle-market companies. We focus primarily on senior secured loans and “stretch” senior secured loans, also referred to as “unitranche” loans, which combine characteristics of traditional first lien senior secured loans and second-lien or subordinated loans. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.
The following is a summary of our investment activity since the completion of our initial public offering. Such amounts are not inclusive of our holdings of United States Treasury Bills.
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Time Period | | Acquisitions(1) (dollars in millions) | | Dispositions(2) (dollars in millions) | | Weighted Average Interest Rate of Portfolio at End of Period(3) |
For the year ended June 30, 2011 | | $ | 90.0 | | | $ | 32.6 | | | | 12.68 | % |
For the year ended June 30, 2012 | | | 55.3 | | | | 38.1 | | | | 12.93 | % |
For the year ended June 30, 2013 | | | 75.1 | | | | 58.1 | | | | 12.90 | % |
For the year ended June 30, 2014 | | | 132.5 | | | | 82.3 | | | | 11.27 | % |
July 1, 2014 through September 30, 2014 | | | 36.5 | | | | 28.7 | | | | 10.53 | % |
October 1, 2014 through December 31, 2014 | | | 28.7 | | | | 23.2 | | | | 10.23 | % |
January 1, 2015 through March 31, 2015 | | | 24.4 | | | | 32.1 | | | | 10.53 | % |
April 1, 2015 through June 30, 2015 | | | 47.5 | | | | 13.9 | | | | 9.99 | % |
For the year ended June 30, 2015 | | | 137.1 | | | | 97.9 | | | | 9.99 | % |
July 1, 2015 through September 30, 2015 | | | 29.8 | | | | 32.7 | | | | 8.93 | % |
Since inception | | $ | 519.8 | | | $ | 341.7 | | | | N/A | |
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| (1) | Includes new deals, additional fundings, refinancings (inclusive of those on revolving credit facilities) and payment in kind “PIK” interest |
| (2) | Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities) |
| (3) | For transactions in the secondary market, the interest rate used for the weighted average interest rate reflects the effective yield on the loan at the purchase price. Weighted average interest rate is based upon the stated coupon rate and face value of outstanding debt securities at the measurement date. Debt securities on non-accrual status are included in the calculation and are treated as having 0.00% as their applicable interest rate for purposes of this calculation, unless such debt securities are valued at zero. |
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At September 30, 2015, the weighted average interest rate of our performing debt investments was 11.03%.
Portfolio Activity for the Three Months Ended September 30, 2015
The primary investment activities for the three months ended September 30, 2015 were fundings and repayments under the revolving credit facilities and the funding of the following loan facilities:
| • | On July 1, 2015, the Company issued a $6.0 million mortgage note to 310E53RD, LLC, a real estate holding company. |
| • | On July 1, 2015, the senior secured credit facility and revolving commitment with Butler Burger Group, LLC, was fully repaid at par plus accrued interest and prepayment fees for total proceeds of $8.6 million. |
| • | On July 15, 2015, the senior secured credit facility with Medinet Investments, LLC was repaid in full at par plus accrued interest for total proceeds of $0.1 million. |
| • | On July 17, 2015, the Company purchased $3.0 million of a $175.0 million senior secured term loan to Liquidnet Holdings, Inc., an equities trading platform, at 96.375% of par. |
| • | On July 31, 2015, the Company purchased an additional $1.0 million of senior secured notes to Lee Enterprises, Incorporated, a daily and weekly newspaper publisher. |
| • | On September 3, 2015, the senior secured credit facility with GW Power, LLC and Greenwood Fuels WI, LLC was partially repaid for total proceeds of $2.2 million. |
| • | On September 4, 2015, Blackberry Ltd announced that it has entered into a definitive agreement to acquire Good Technology Corporation for $425 million in cash. Upon closing of the transaction, the Company is expected to receive an $11 million repayment on its first lien notes, which would reflect a 110% redemption on the Company’s initial investment. |
| • | On September 10, 2015, the Company sold the full $2.0 million of the second lien term loan with GK Holdings, Inc. for total proceeds of $2.0 million plus accrued interest. |
| • | During the quarter ended September 30, 2015, the Company funded an additional $0.4 million of the senior secured term loan B to U.S. Oilfield Company, LLC, which increased the Company’s total investment to $7.1 million. The Company funded $0.3 million of the increase and the remainder was funded by a third party. The Company also received additional warrants for 2.964% of the class B non-voting shares of U.S. Oilfield Company, LLC. |
Portfolio Reconciliation
The following is a reconciliation of the investment portfolio, including our open swap contract, for the three months ended September 30, 2015 and for the year ended June 30, 2015:
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| | Three Months Ended September 30, 2015 (Unaudited) | | Year Ended June 30, 2015 |
Beginning Investment Portfolio | | $ | 152,113,759 | | | $ | 150,190,759 | |
Portfolio Investments Acquired(1) | | | 29,765,923 | | | | 137,121,602 | |
Amortization and Accretion of Fixed Income Premiums and Discounts | | | 450,363 | | | | 1,496,851 | |
Portfolio Investments Repaid | | | (32,716,709 | ) | | | (97,880,572 | ) |
Sales and Maturities of Treasury Securities(2) | | | — | | | | (25,000,000 | ) |
Net Change in Unrealized Gain (Loss) on Investments and Open Swap Contract | | | (7,460,833 | ) | | | (6,237,328 | ) |
Net Realized Gains (Losses) on Investments and Open Swap Contract | | | 128,911 | | | | (7,577,553 | ) |
Ending Investment Portfolio | | $ | 142,281,414 | | | $ | 152,113,759 | |
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| (1) | Includes PIK interest. |
| (2) | U.S. Treasury Securities were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. |
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During the three months ended September 30, 2015, we recorded net unrealized appreciation (depreciation) of $(7,460,833). This consisted of $(6,354,375) of net unrealized depreciation on debt investments, $(1,331,458) of net unrealized depreciation on equity investments, and $225,000 of net unrealized appreciation on an open swap contract.
Portfolio Classifications
The following table shows the fair value of our portfolio of investments, including our open swap contract, by asset class as of September 30, 2015 and June 30, 2015.
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| | September 30, 2015 (Unaudited) | | June 30, 2015 |
| | Investments at Fair Value (dollars in millions) | | Percentage of Total Portfolio | | Investments at Fair Value (dollars in millions) | | Percentage of Total Portfolio |
Investments:
| | | | | | | | | | | | | | | | |
Senior Secured Loans | | $ | 116.3 | | | | 81.7 | % | | $ | 122.8 | | | | 80.7 | % |
Subordinated Secured Loans | | | 5.9 | | | | 4.1 | | | | 7.9 | | | | 5.2 | |
Unsecured Notes | | | 3.2 | | | | 2.3 | | | | 3.2 | | | | 2.1 | |
Warrants | | | 0.2 | | | | 0.1 | | | | 2.7 | | | | 1.8 | |
Limited Liability Company Interests | | | 3.2 | | | | 2.3 | | | | 1.2 | | | | 0.8 | |
Common Stock | | | 13.3 | | | | 9.4 | | | | 14.3 | | | | 9.4 | |
Total Investments at Fair Value | | | 142.1 | | | | 99.9 | | | | 152.1 | | | | 100.0 | |
Open Swap Contract:
| | | | | | | | | | | | | | | | |
Total Return Swap | | | 0.2 | | | | 0.1 | | | | — | | | | — | |
Total Open Swap Contract at Fair Value | | $ | 0.2 | | | | 0.1 | % | | $ | — | | | | — | % |
At September 30, 2015, the 31 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 58% (i.e., each $58 of loan value outstanding is secured by $100 of collateral value). At June 30, 2015, the 32 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 59% (i.e., each $59 of loan value outstanding is secured by $100 of collateral value).
The following table shows the fair value of our portfolio of investments by industry, as of September 30, 2015 and June 30, 2015. This table does not include our open swap contract.
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| | September 30, 2015 (Unaudited) | | June 30, 2015 |
| | Investments at Fair Value (dollars in millions) | | Percentage of Total Investment Portfolio* | | Investments at Fair Value (dollars in millions) | | Percentage of Total Investment Portfolio |
Power Generation | | $ | 12.8 | | | | 9.0 | % | | $ | 13.0 | | | | 8.5 | % |
Mobile Device Management | | | 11.0 | | | | 7.7 | | | | 11.1 | | | | 7.3 | |
Building Cleaning and Maintenance Services | | | 10.6 | | | | 7.5 | | | | 10.7 | | | | 7.0 | |
Radio Broadcasting | | | 9.5 | | | | 6.6 | | | | 9.3 | | | | 6.1 | |
Appliance Parts Distributor | | | 7.9 | | | | 5.6 | | | | 8.0 | | | | 5.2 | |
Wireless Communications | | | 7.8 | | | | 5.5 | | | | 8.0 | | | | 5.2 | |
Consumer Financing | | | 7.5 | | | | 5.2 | | | | 7.9 | | | | 5.2 | |
Oil and Gas Field Services | | | 6.5 | | | | 4.5 | | | | 10.1 | | | | 6.8 | |
Specialty Pharmaceuticals | | | 5.9 | | | | 4.2 | | | | 6.0 | | | | 3.9 | |
Real Estate Holding Company | | | 5.9 | | | | 4.1 | | | | — | | | | — | |
Television Programming | | | 5.6 | | | | 4.0 | | | | 5.8 | | | | 3.8 | |
Information and Data Services | | | 5.5 | | | | 3.9 | | | | 3.4 | | | | 2.2 | |
Maritime Security Services | | | 5.5 | | | | 3.9 | | | | 6.0 | | | | 3.9 | |
Hotel Operator | | | 4.2 | | | | 2.9 | | | | 4.3 | | | | 2.8 | |
Gambling Machine Manufacturer | | | 3.9 | | | | 2.8 | | | | 3.8 | | | | 2.5 | |
Grain Mill Products | | | 3.8 | | | | 2.7 | | | | 3.3 | | | | 2.2 | |
Food Distributors and Wholesalers | | | 3.8 | | | | 2.7 | | | | 3.8 | | | | 2.5 | |
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| | September 30, 2015 (Unaudited) | | June 30, 2015 |
| | Investments at Fair Value (dollars in millions) | | Percentage of Total Investment Portfolio* | | Investments at Fair Value (dollars in millions) | | Percentage of Total Investment Portfolio |
Biological Products | | $ | 3.5 | | | | 2.5 | % | | $ | 3.4 | | | | 2.3 | % |
Data Connectivity Service Company | | | 3.2 | | | | 2.2 | | | | 3.2 | | | | 2.1 | |
Electric Services | | | 3.1 | | | | 2.2 | | | | 5.2 | | | | 3.5 | |
Equities Trading Platform | | | 2.9 | | | | 2.0 | | | | — | | | | — | |
Daily and Weekly Newspaper Publisher | | | 2.8 | | | | 2.0 | | | | 2.0 | | | | 1.3 | |
Internet Advertising | | | 2.2 | | | | 1.5 | | | | 2.4 | | | | 1.6 | |
Munitions | | | 2.2 | | | | 1.5 | | | | 2.6 | | | | 1.7 | |
Outdoor Advertising Services | | | 2.0 | | | | 1.4 | | | | 2.0 | | | | 1.3 | |
Energy Efficiency Services | | | 0.7 | | | | 0.5 | | | | 3.6 | | | | 2.4 | |
Equipment Rental Services | | | 0.6 | | | | 0.5 | | | | 0.6 | | | | 0.4 | |
Non-Residential Property Owner | | | 0.6 | | | | 0.4 | | | | 1.3 | | | | 0.9 | |
Asset Recovery Services | | | 0.5 | | | | 0.4 | | | | 0.5 | | | | 0.3 | |
Geophysical Surveying and Mapping Services | | | 0.1 | | | | 0.1 | | | | 0.2 | | | | 0.1 | |
Real Estate Management Services | | | — | | | | — | | | | 8.5 | | | | 5.6 | |
IT and Business Skill Training | | | — | | | | — | | | | 2.0 | | | | 1.3 | |
Medical Liability Claims Factoring | | | — | | | | — | | | | 0.1 | | | | 0.1 | |
Healthcare Billing and Collections | | | — | | | | — | | | | — | | | | — | |
Cable TV/Broadband Services | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 142.1 | | | | 100.0 | % | | $ | 152.1 | | | | 100.0 | % |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| * | Total investment portfolio does not include our open swap contract. |
Portfolio Grading
We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of September 30, 2015, our portfolio had a weighted average grade of 2.97, based upon the fair value of the debt investments in the portfolio. Equity securities and investments in United States Treasury Bills are not graded. This was an increase of 0.01 from the weighted average grade of 2.96 at June 30, 2015.
At September 30, 2015, our debt investment portfolio was graded as follows:
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| | September 30, 2015 (Unaudited) |
Grade | | Summary Description | | Fair Value | | Percentage of Total Portfolio* |
1 | | | Involves the least amount of risk in our portfolio, the portfolio company is performing above expectations, and the trends and risk profile are favorable (including a potential exit). | | | $ | — | | | | — | % |
2 | | | The portfolio company is performing above expectations and the risk profile is generally favorable. | | | | 21,636,161 | | | | 15.21 | |
3 | | | Risk that is similar to the risk at the time of origination, the portfolio company is performing as expected, and the risk profile is generally neutral; all new investments are initially assessed a grade of 3. | | | | 88,838,273 | | | | 62.44 | |
4 | | | The portfolio company is performing below expectations, requires procedures for closer monitoring, may be out of compliance with debt covenants, and the risk profile is generally unfavorable. | | | | 12,122,243 | | | | 8.52 | |
5 | | | The investment is performing well below expectations and is not anticipated to be repaid in full. | | | | 2,765,662 | | | | 1.94 | |
| | | | | | $ | 125,362,339 | | | | 88.11 | % |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| * | Total portfolio includes our total investments at fair value and open swap contract at fair value. |
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At June 30, 2015, our debt investment portfolio was graded as follows:
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| | June 30, 2015 |
Grade | | Summary Description | | Fair Value | | Percentage of Total Portfolio |
1 | | | Involves the least amount of risk in our portfolio, the portfolio company is performing above expectations, and the trends and risk profile are favorable (including a potential exit). | | | $ | 8,516,728 | | | | 5.60 | % |
2 | | | The portfolio company is performing above expectations and the risk profile is generally favorable. | | | | 10,720,287 | | | | 7.05 | |
3 | | | Risk that is similar to the risk at the time of origination, the portfolio company is performing as expected, and the risk profile is generally neutral; all new investments are initially assessed a grade of 3. | | | | 98,780,645 | | | | 64.93 | |
4 | | | The portfolio company is performing below expectations, requires procedures for closer monitoring, may be out of compliance with debt covenants, and the risk profile is generally unfavorable. | | | | 9,932,823 | | | | 6.53 | |
5 | | | The investment is performing well below expectations and is not anticipated to be repaid in full. | | | | 5,955,315 | | | | 3.92 | |
| | | | | | $ | 133,905,798 | | | | 88.03 | % |
We expect that a portion of our investments will be in grades 4 or 5 from time to time, and, as such, we will be required to work with portfolio companies to improve their business and protect our investment. The number and amount of investments included in grades 4 or 5 may fluctuate from period to period.
Results of Operations
Comparison of the three months ended September 30, 2015 and 2014
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| | Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 |
| | Total | | Per Share(1) | | Total | | Per Share(1) |
Total Investment Income | | $ | 4,740,622 | | | $ | 0.20 | | | $ | 4,086,624 | | | $ | 0.34 | |
Interest Income(2) | | | 4,194,493 | | | | 0.18 | | | | 3,877,599 | | | | 0.33 | |
Dividend Income | | | 20,647 | | | | 0.00 | | | | — | | | | — | |
Other Income | | | 525,482 | | | | 0.02 | | | | 209,025 | | | | 0.01 | |
Net Operating Expenses | | | 2,316,406 | | | | 0.10 | | | | 2,244,550 | | | | 0.18 | |
Management Fee | | | 611,929 | | | | 0.03 | | | | 572,558 | | | | 0.05 | |
Incentive Fee | | | 481,777 | | | | 0.02 | | | | 389,850 | | | | 0.03 | |
Total Advisory Fees | | | 1,093,706 | | | | 0.05 | | | | 962,408 | | | | 0.08 | |
Administrative Fees | | | 195,282 | | | | 0.01 | | | | 175,677 | | | | 0.01 | |
Director’s Fees | | | 45,750 | | | | 0.00 | | | | 47,946 | | | | 0.00 | |
Interest Expenses | | | 1,003,829 | | | | 0.04 | | | | 1,002,383 | | | | 0.08 | |
Professional Services Expense | | | 339,552 | | | | 0.01 | | | | 219,668 | | | | 0.02 | |
Bank Fees | | | 8,741 | | | | 0.00 | | | | 10,271 | | | | 0.00 | |
Other | | | 126,655 | | | | 0.01 | | | | 108,871 | | | | 0.01 | |
Management Fee Waiver and Expense Reimbursement | | | (497,109 | ) | | | (0.02 | ) | | | (282,674 | )) | | | (0.02 | ) |
Net Investment Income | | | 2,424,216 | | | | 0.11 | | | | 1,842,074 | | | | 0.16 | |
Net Change in Unrealized Gain (Loss) | | | (7,460,833 | ) | | | (0.31 | ) | | | (2,015,035 | ) | | | (0.17 | ) |
Net Realized Loss | | | 128,911 | | | | (0.01 | ) | | | 401,659 | | | | 0.03 | |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | The basic per share figures noted above are based on a weighted average of 23,175,342 and 11,877,534 shares outstanding for the three months ended September 30, 2015 and September 30, 2014, respectively, except where such amounts need to be adjusted to be consistent with what is disclosed in the financial highlights of our audited Consolidated Financial Statements. |
| (2) | Interest income includes PIK interest of $44,520 and $101,614 for the three months ended September 30, 2015 and September 30, 2014, respectively. |
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Total Investment Income
Total investment income includes interest and dividend income on our investments and other income, which is typically comprised of fee income. Fee income typically consists of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income increased from $4,086,624 for the three months ended September 30, 2014 to $4,740,622 for the three months ended September 30, 2015. The increase in investment income was predominantly due to increased interest income and other income. The increase in interest income for the three months ended September 30, 2015 relative to the three months ended September 30, 2014 is primarily due to a larger average investment portfolio. The increase in other income is predominantly due to prepayment fees received as a result of the payoff of Butler Burger Group, LLC.
Total investment income decreased on a per share basis, as interest income decreased from $0.33 per share to $0.18 per share. Other income per share increased from $0.01 per share for the three months ended September 30, 2014 to $0.02 per share for the three months ended September 30, 2015. Per share figures noted above reflect an increase in the weighted average shares outstanding from 11,877,534 to 23,175,342 for the three months ended September 30, 2014 and 2015, respectively; this increase in share count from our rights offering decreased the per share impact of increased total investment income.
Expenses
Net operating expenses increased from $2,244,550 for the three months ended September 30, 2014 to $2,316,406 for the three months ended September 30, 2015. The increase in net operating expenses is primarily due to increased professional services expenses and advisory fees. As we increased our capital base, we were able to fund portfolio growth, which had the effect of increasing management fees as a result of a larger average investment portfolio, and increasing incentive fees due to greater pre-incentive fee net investment income. The increase in professional fees was primarily due to fees for the initial annual audit of the Company’s internal controls over financial reporting. The increase in net operating expenses was partially offset by the management fee waiver and the increase in the expense reimbursement provided by our investment adviser. Refer to Note 5 of our Consolidated Financial Statements for our expense reimbursement policy.
Net operating expenses per share decreased from $0.18 per share for the three months ended September 30, 2014 to $0.10 per share for the three months ended September 30, 2015. This decrease is predominantly related to a decrease of $0.04 per share due to lower interest expense related to reduced borrowings, on a per share basis for the three months ended September 30, 2015. Per share figures noted above reflect an increase in the weighted average shares outstanding from 11,877,534 to 23,175,342 for the three months ended September 30, 2014 and September 30, 2015, respectively; this increase in share count from our rights offering decreased the per share impact of increased net operating expenses.
Net Investment Income
Net investment income increased from $1,842,074 for the three months ended September 30, 2014 to $2,424,216 for the three months ended September 30, 2015. The increase in net investment income for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014 was primarily due to greater interest income from a larger average investment portfolio and increased fee income related to the prepayment fees received as a result of the payoff of Butler Burger Group, LLC. Net investment income also increased due to the management fee waiver and our investment adviser’s reimbursement of certain operating expenses which totaled $497,109 during the three months ended September 30, 2015, as compared to $282,674 for the three months ended September 30, 2014. The increase in interest income was partially offset by greater management and incentive fees resulting from a larger portfolio and greater pre-incentive fee net investment income during the period.
Net investment income per share decreased from $0.16 per share for the three months ended September 30, 2014 to $0.11 per share for the three months ended September 30, 2015. Per share figures noted above reflect an increase in the weighted average shares outstanding from 11,877,534 to 23,175,342 for
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the three months ended September 30, 2014 as compared to the three months ended September 30, 2015. This increase in share count from our rights offering decreased the per share impact of increased net investment income.
Realized Gain (Loss) on Investments
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.
During the three months ended September 30, 2015, we recorded net realized gains of $128,911, primarily in connection with the proceeds of $99,656 received from the Reef Road open swap contract, the gain on the sale of General Cannabis Corp. common stock for $73,826 and the partial repayment of the term loan to PEAKS Trust 2009-1 for $51,367. This was partially offset by a loss on the full payoff of Medinet Investments, LLC of $86,230.
During the three months ended September 30, 2014, we recorded a realized gain of $401,659, primarily in connection with a gain on the partial prepayment of PEAKS Trust 2009-1 of $409,313.
Change in Unrealized Gain (Loss) on Investments
Net unrealized appreciation or depreciation recorded on investments is the net change in the fair value of our investment portfolio during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. See “Critical Accounting Policies — Change in Unrealized Gain (Loss) on Investments.”
From time to time, the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized gain (loss) is included on the Consolidated Statements of Operations as a (decrease) increase in the Net Change in Unrealized Gain (Loss) on Investments.
Net change in unrealized appreciation (depreciation) on investments and open swap contract was $(7,460,833) for the three months ended September 30, 2015 compared to $(2,015,035) for the three months ended September 30, 2014. The following table summarizes the significant changes in unrealized appreciation (depreciation) of the Company’s investment portfolio, including our open swap contract, for the three months ended September 30, 2015 by portfolio company.
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Portfolio Company | | Change in Unrealized Appreciation (Depreciation) | | September 30, 2015 (Unaudited) | | June 30, 2015 |
| Cost | | Fair Value | | Unrealized Appreciation (Depreciation) | | Cost | | Fair Value | | Unrealized Appreciation (Depreciation) |
Modular Process Control, LLC | | $ | (3,124,573 | ) | | $ | 7,436,694 | | | $ | 697,480 | | | $ | (6,739,214 | ) | | $ | 7,278,468 | | | $ | 3,663,827 | | | $ | (3,614,641 | ) |
US Shale Solutions, Inc. | | | (2,610,090 | ) | | | 6,642,071 | | | | 1,845,000 | | | | (4,797,071 | ) | | | 6,642,071 | | | | 4,455,090 | | | | (2,186,981 | ) |
US Oilfield Company, LLC | | | (1,527,080 | ) | | | 6,219,288 | | | | 4,654,907 | | | | (1,564,381 | ) | | | 5,720,639 | | | | 5,683,338 | | | | (37,301 | ) |
General Cannabis Corp. | | | (645,791 | ) | | | 415,771 | | | | 563,704 | | | | 147,933 | | | | 515,094 | | | | 1,308,818 | | | | 793,724 | |
West World Media, LLC | | | 1,950,549 | | | | 430,500 | | | | 2,200,000 | | | | 1,769,500 | | | | 430,500 | | | | 249,451 | | | | (181,049 | ) |
Other(1) | | | (1,503,848 | ) | | | 148,680,067 | | | | 132,320,323 | | | | (16,359,744 | ) | | | 151,609,131 | | | | 136,753,235 | | | | (14,855,896 | ) |
Totals | | $ | (7,460,833 | ) | | $ | 169,824,391 | | | $ | 142,281,414 | | | $ | (27,542,977 | ) | | $ | 172,195,903 | | | $ | 152,113,759 | | | $ | (20,082,144 | ) |
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif)
| (1) | Other represents all remaining investments. |
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Liquidity and Capital Resources
At September 30, 2015, we had investments in debt securities of 31 companies, totaling approximately $125.4 million at fair value, equity investments in 17 companies, totaling approximately $16.7 million at fair value, and an open swap contract with 1 company, held at approximately $0.2 million at fair value. The debt investment amount includes approximately $44,520 in accrued PIK interest earned for the three months ended September 30, 2015, and $446,905, cumulatively, which is added to the carrying value of our investments.
For the three months ended September 30, 2015, cash used in operating activities, consisting primarily of net purchases of investments and the items described in “Results of Operations,” was approximately $8.6 million, reflecting the purchases and repayments of investments, net investment income resulting from operations, offset by non-cash income related to OID income, changes in working capital and accrued interest receivable. Net cash provided by purchases and sales of investments was approximately $2.8 million, reflecting additional investments of $29.8 million, offset by principal repayments of $32.6 million.
As of September 30, 2015, we had $9.0 million outstanding under our senior secured credit facility (the “Credit Facility”) with Santander Bank, N.A. (“Santander Bank”), as administrative agent. On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million. On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company has not exercised its option to expand the Credit Facility as of September 30, 2015. In addition, as of September 30, 2015, the Company had $33.6 million in Notes Payable outstanding.
As a business development company, we generally have an ongoing need to raise additional capital for investment purposes. As a result, we expect, from time to time, to access the debt and equity markets when we believe it is necessary and appropriate to do so. In this regard, we continue to explore various options for obtaining additional debt or equity capital for investments. This may include expanding or extending our Credit Facility, or the issuance of additional shares of our common stock, possibly at prices below our then current net asset value per share pursuant to a proposal, approved by our stockholders at our most recent Special Meeting of Stockholders, authorizing us to sell shares of our common stock below its then current net asset value per share in one or more offerings for a period of one year or, if earlier, the date of our next Annual Meeting of Shareholders. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. We are currently not seeking such approval. If we are unable to obtain leverage or raise equity capital on terms that are acceptable to us, our ability to grow our portfolio will be substantially impacted.
Capital Raises
On July 14, 2014, we sold 506,000 shares of our common stock at $7.40 per share in a direct registered offering to certain investors for total gross proceeds of approximately $3.7 million.
Our non-transferable rights offering to our stockholders of record as of 5:00 p.m., New York City time, on March 6, 2015 expired at 5:00 p.m., New York City time, on March 30, 2015. The rights entitled holders of rights to subscribe for an aggregate of up to 11,949,034 shares of our common stock. Record date stockholders received one right for each share of common stock owned on the record date. The rights entitled the holder to purchase one new share of common stock for every one right held and record date stockholders who fully exercised their rights were entitled to subscribe, subject to certain limitations and pro-rata allocation, for additional shares that remain unsubscribed as a result of any unexercised rights. The subscription price per share was $3.50. The net proceeds from this rights offering, after deducting the fee payable to the dealer managers and offering expenses, were approximately $37.8 million, which we received on April 6, 2015. In connection with this rights offering, the dealer manager received a fee for its financial advisory, marketing and soliciting services equal to a maximum of 4.0% of the subscription price per share for each share issued pursuant to the exercise of rights, including pursuant to the over-subscription privilege. We incurred offering expenses, including the dealer manager fee, of $1,401,660 in connection with this rights offering.
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As part of the rights offering, an institutional investor committed to purchase approximately 214,000 shares in open market transactions over a seven-day period following the expiration date of the rights offering. The institutional investor agreed to acquire the remainder of the 214,000 shares in a private placement directly from the Company to the extent such shares were not purchased in open market transactions during such seven-day period. Subsequent to the seven-day period, on April 13, 2015, such investor acquired 80,475 shares, the remainder of its initial commitment of approximately 214,000 shares, in a private placement at $3.50 per share directly from the Company. We incurred offering expenses of $3,345 in connection with this offering.
Share Repurchase Program
On April 7, 2014, the Board of Directors authorized a share repurchase program which provides for the purchase of up to 1 million shares of outstanding common stock to be implemented at the discretion of our management team. On August 26, 2015, the Board of Directors authorized the purchase of an additional 1 million shares to provide for the purchase of up to 2 million shares of the outstanding common stock as part of the share repurchase program. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act. For the quarter ended September 30, 2015, the Company repurchased 472,407 shares under the share repurchase program at the weighted average price of $3.19 per share. As of November 9, 2015, the Company has repurchased an aggregate of 763,187 shares under the share repurchase program at the weighted average price of $3.17 per share, resulting in $2.4 million of cash paid, under the program since September 17, 2015.
Contractual Obligations
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| | Payments Due By Period (dollars in millions) |
| | Total | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | More than 5 years |
Credit Facility(1) | | $ | 9.0 | | | $ | 9.0 | | | $ | — | | | $ | — | | | $ | — | |
Notes | | | 33.6 | | | | — | | | | — | | | | 33.6 | | | | — | |
Total | | $ | 42.6 | | | $ | 9.0 | | | $ | — | | | $ | 33.6 | | | $ | — | |
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| (1) | On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank, N.A. to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company has not exercised its option to expand the facility as of September 30, 2015. At September 30, 2015, $36.0 million remained unused under the Credit Facility. |
In addition to the contractual obligations set forth above, we have certain obligations with respect to the investment advisory and administration services we receive. See “Overview.” We incurred fees of $1,093,706 for investment advisory services and $195,282 for administrative services for the three months ended September 30, 2015.
As of September 30, 2015, we had approximately $1.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Borrowings
Secured Revolving Credit Facility. On June 3, 2013, we entered into a credit agreement with Santander Bank, as administrative agent, which provided us with our $32.5 million Credit Facility. The Credit Facility replaced our prior senior secured revolving credit facility with FCC, LLC d/b/a First Capital.
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The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (one month, two month or three month, depending on our option) plus 3.25% to 4.00% per annum, or from Santander Bank’s prime rate plus 1.25% to 2.00% per annum, based on our election. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of our assets. Under the Credit Facility, we have made certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature. On November 6, 2013, the Company increased the size of its Credit Facility with Santander Bank from $32.5 million to $45.0 million. On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company has not exercised its option to expand the Credit Facility as of September 30, 2015.
Notes Payable. On June 28, 2013, we issued approximately $21.1 million in aggregate principal amount of our 8.25% Notes due June 30, 2020 for net proceeds of approximately $20.2 million after deducting underwriting commissions of approximately $0.9 million. Offering expenses of approximately $0.2 million were incurred.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the “Indenture”), between us and U.S. Bank National Association (the “Trustee”). The Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 8.25% per annum, beginning September 30, 2013. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at our option on or after June 30, 2016. The Notes are listed on the NASDAQ Global Market under the trading symbol “FULLL” with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the Notes and the Trustee if we cease 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. We may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of September 30, 2015, we had not repurchased any of the Notes in the open market.
On July 14, 2014, we closed an offering of Notes consisting of $12,500,000 in aggregate principal amount of the Notes. The Notes were sold at price of $25.375 plus accrued interest from June 30, 2014, a premium to par value of $25.00 per Note, for total gross proceeds of approximately $12.7 million. The Notes are a further issuance of, rank equally in right of payment with, and form a single series with the $21,145,525 of outstanding Notes that will mature on June 30, 2020, and may be redeemed in whole or in part at any time or from time to time at our option on or after June 30, 2016.
Distributions
In order to qualify as a regulated investment company and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis.
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The following table lists the cash distributions, including dividends and returns of capital, if any, per share that we have declared since our formation on April 16, 2010. The table is divided by fiscal year according to record date.
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Date Declared | | Record Date | | Payment Date | | Amount |
Total Fiscal 2011 | | | | | | | | | | $ | 0.751 | |
Total Fiscal 2012 | | | | | | | | | | $ | 0.918 | |
Total Fiscal 2013 | | | | | | | | | | $ | 0.924 | |
Total Fiscal 2014 | | | | | | | | | | $ | 0.864 | |
Fiscal 2015:
| | | | | | | | | | | | |
May 2, 2014 | | | July 31, 2014 | | | | August 15, 2014 | | | $ | 0.067 | |
May 2, 2014 | | | August 29, 2014 | | | | September 15, 2014 | | | | 0.067 | |
May 2, 2014 | | | September 30, 2014 | | | | October 15, 2014 | | | | 0.067 | |
September 8, 2014 | | | October 31, 2014 | | | | November 14, 2014 | | | | 0.067 | |
September 8, 2014 | | | November 28, 2014 | | | | December 15, 2014 | | | | 0.067 | |
September 8, 2014 | | | December 31, 2014 | | | | January 15, 2015 | | | | 0.067 | |
November 3, 2014 | | | January 30, 2015 | | | | February 13, 2015 | | | | 0.067 | |
November 3, 2014 | | | February 27, 2015 | | | | March 13, 2015 | | | | 0.067 | |
November 3, 2014 | | | March 31, 2015 | | | | April 15, 2015 | | | | 0.067 | |
February 20, 2015 | | | April 30, 2015 | | | | May 15, 2015 | | | | 0.035 | |
February 20, 2015 | | | May 29, 2015 | | | | June 15, 2015 | | | | 0.035 | |
February 20, 2015 | | | June 30, 2015 | | | | July 15, 2015 | | | | 0.035 | |
Total (2015) | | | | | | | | | | $ | 0.708 | |
Fiscal 2016:
| | | | | | | | | | | | |
May 5, 2015 | | | July 31, 2015 | | | | August 14, 2015 | | | $ | 0.035 | |
May 5, 2015 | | | August 31, 2015 | | | | September 15, 2015 | | | | 0.035 | |
May 5, 2015 | | | September 30, 2015 | | | | October 15, 2015 | | | | 0.035 | |
August 4, 2015 | | | October 30, 2015 | | | | November 13, 2015 | | | | 0.035 | |
August 4, 2015 | | | November 30, 2015 | | | | December 15, 2015 | | | | 0.035 | |
August 4, 2015 | | | December 31, 2015 | | | | January 15, 2016 | | | | 0.035 | |
November 3, 2015 | | | January 29, 2016 | | | | February 15, 2016 | | | | 0.035 | |
November 3, 2015 | | | February 29, 2016 | | | | March 15, 2016 | | | | 0.035 | |
November 3, 2015 | | | March 31, 2016 | | | | April 15, 2016 | | | | 0.035 | |
Total 2016 to date | | | | | | | | | | $ | 0.315 | |
Related Parties
We have entered into a number of business relationships with affiliated or related parties, including the following:
| • | We have entered into the Investment Advisory Agreement with Full Circle Advisors. John E. Stuart, our Chairman, and Gregg J. Felton, our Chief Executive Officer and President, are both managing members of, and have financial and controlling interests in, Full Circle Advisors. |
| • | We have entered into the Administration Agreement with Full Circle Service Company. Pursuant to the terms of the Administration Agreement, Full Circle Service Company provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Stuart, our Chairman, and Mr. Felton, our Chief Executive Officer and President, are managing members of, and have financial and controlling interests in, Full Circle Service Company. Our Chief Financial Officer, Michael J. Sell, is the Vice President of Full Circle Service Company. |
| • | We have entered into a license agreement with Full Circle Advisors, pursuant to which Full Circle Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Full Circle.” |
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FCCIP is a multiple series private fund, for which we serve as the managing member and investment adviser. FCCIP was formed as a Delaware limited liability company and operates under a limited liability company agreement dated June 13, 2014. We may co-invest in certain portfolio investments from time to time with one or more series issued by FCCIP where we determine that the aggregate available investment opportunity exceeds what we believe would be appropriate for us to acquire directly, subject to certain conditions. In addition, we expect to receive certain fees or other distributions for FCCIP in connection with the services we provide to each series it may issue. Such fees may include management fees, incentive fees and administration fees and could be offset by expense caps or waivers in the future.
Certain members of Full Circle Advisors’ investment committee presently manage Full Circle Funding, LP, a specialty lender serving lower middle-market companies. Although the existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, are no longer making investments in new opportunities, any affiliated investment vehicle formed in the future and managed by our investment adviser or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. Full Circle Advisors and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, Full Circle Advisors or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with Full Circle Advisors’ allocation procedures.
We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Chairman, Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics. As required by the NASDAQ corporate governance listing standards, the Audit Committee of our Board of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
Recent Developments
Recent Portfolio Activity
On October 30, 2015, the Company sold its equity interest in West World Media, LLC for total proceeds of $2.2 million.
On October 30, 2015, the senior secured revolving loan with TransAmerican Asset Servicing Group, LLC was repaid with total proceeds of approximately $0.5 million.
Distribution
On November 3, 2015, the Board of Directors declared the following monthly distributions:
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Record Date | | Payment Date | | Per Share Amount |
January 29, 2016 | | | February 15, 2016 | | | $ | 0.035 | |
February 29, 2016 | | | March 15, 2016 | | | $ | 0.035 | |
March 31, 2016 | | | April 15, 2016 | | | $ | 0.035 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are subject to financial market risks, including changes in interest rates. As of September 30, 2015, 10 debt investments in our portfolio bore interest at a fixed rate, and the remaining 30 debt investments were at variable rates, representing approximately $36.3 million and $89.1 million in principal debt, respectively. The variable rates are based upon LIBOR.
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To illustrate the potential impact of a change in the underlying interest rate on our net investment income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%, and 3% decrease in the underlying Prime Rate or LIBOR, and no other change in our portfolio as of September 30, 2015. We have also assumed outstanding floating rate borrowings by the Company of $9.0 million. See the below table for the effect the rate changes would have on net investment income.
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LIBOR or Prime Rate Increase (Decrease) | | Increase (decrease) of Net Investment Income (in millions) |
3.00% | | $ | 1.9 | |
2.00% | | $ | 1.1 | |
1.00% | | $ | 0.4 | |
(1.00)% | | $ | (0.0 | ) |
(2.00)% | | $ | (0.0 | ) |
(3.00)% | | $ | (0.1 | ) |
Although management believes that this analysis is indicative of our existing interest rate sensitivity at September 30, 2015, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including borrowing under a credit facility, that could affect the net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
| Item 4. | Controls and Procedures |
As of September 30, 2015, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
None of us, our investment adviser or administrator, is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our investment adviser or administrator. From time to time, we, our investment adviser or administrator, may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. There have been no material changes during the three months ended September 30, 2015 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended June 30, 2015.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
We did not engage in unregistered sales of equity securities during the three months ended September 30, 2015.
Issuer Purchases of Equity Securities
For the quarter ended September 30, 2015, as a part of our dividend reinvestment plan for our common stockholders, we purchased 24,669 shares of our common stock for an average price of approximately $3.41 per share in the open market in order to satisfy the reinvestment portion of our dividends. The following chart outlines repurchases of our common stock during the quarter ended September 30, 2015.
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Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
July 2015 | | | 15,012 | | | $ | 3.55 | | | | — | | | | — | |
August 2015 | | | 4,805 | | | $ | 3.23 | | | | — | | | | — | |
September 2015 | | | 4,852 | | | $ | 3.17 | | | | — | | | | — | |
Total | | | 24,669 | | | $ | 3.41 | | | | — | | | | — | |
For the quarter ended September 30, 2015, the Company repurchased 472,407 shares under the share repurchase program at the weighted average price of $3.19 per share. As of November 9, 2015, the Company has repurchased an aggregate of 763,187 shares under the share repurchase program at the weighted average price of $3.17 per share, resulting in $2.4 million of cash paid, under the program since September 17, 2015.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
Not applicable.
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The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
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Exhibit Number | | Description |
3.1 | | Articles of Amendment and Restatement(2) |
3.2 | | Amended and Restated Bylaws(9) |
4.1 | | Form of Common Stock Certificate(1) |
4.2 | | Form of Note Agreement for Distribution Notes(1) |
4.3 | | Indenture, dated as of June 3, 2013(6) |
4.4 | | Form of First Supplemental Indenture(7) |
4.5 | | Form of Global Note (included as Exhibit A to the Form of First Supplemental Indenture)(7) |
10.1 | | Amended and Restated Dividend Reinvestment Plan(13) |
10.2 | | Investment Advisory Agreement by and between Registrant and Full Circle Advisors, LLC(1) |
10.3 | | Administration Agreement by and between Registrant and Full Circle Service Company, LLC(1) |
10.4 | | Credit Agreement by and among Registrant, Sovereign Bank, N.A., as agent, and the lenders party thereto, dated as of June 3, 2013(5) |
10.5 | | First Amendment to Credit Agreement by and between Registrant and Sovereign Bank, N.A., as agent, dated as of September 25, 2013.(10) |
10.6 | | Second Amendment to Credit Agreement by and between Registrant, Santander Bank, N.A. (formerly known as Sovereign Bank, N.A.), as agent, and the lenders party thereto, dated as of November 6, 2013(11) |
10.7 | | Third Amendment to Credit Agreement by and between Registrant, Santander Bank, N.A. (formerly known as Sovereign Bank, N.A.), as agent, and the lenders party thereto, dated as of September 12, 2014.(12) |
10.8 | | Pledge Agreement by Registrant in favor of Sovereign Bank, N.A., as agent, dated as of June 3, 2013(5) |
10.9 | | Security Agreement by Registrant in favor of Sovereign Bank, N.A., as agent, dated as of June 3, 2013(5) |
10.10 | | Form of Indemnification Agreement by and between Registrant and each of its directors(1) |
10.11 | | Trademark License Agreement by and between Registrant and Full Circle Advisors, LLC(1) |
10.12 | | Form of Purchase and Sale Agreement by and between Registrant, Full Circle Partners, LP, Full Circle Fund, Ltd., Full Circle Offshore, LLC, and FCC, LLC d/b/a First Capital(2) |
11 | | Computation of Per Share Earnings (included in the Consolidated Financial Statements contained in this report) |
14.1 | | Code of Ethics(8) |
14.2 | | Code of Business Conduct(8) |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended* |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended* |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002* |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002* |
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| (1) | Incorporated by reference to Registrant’s registration statement on Form N-2 Pre-Effective Amendment No. 2 (File No. 333-166302) filed on August 5, 2010. |
| (2) | Incorporated by reference to Registrant’s registration statement on Form N-2 Pre-Effective Amendment No. 3 (File No. 333-166302) filed on August 26, 2010. |
| (3) | Incorporated by reference to Registrant’s registration statement on Form N-2 Pre-Effective Amendment No. 2 (File No. 333-180321) filed on July 13, 2012. |
| (4) | Incorporated by reference to the Registrant’s registration statement on Form N-2 (File No. 333-187207) filed on March 12, 2013. |
| (5) | Incorporated by reference to Registrant’s current report on Form 8-K (File No. 814-00809) filed on June 4, 2013. |
| (6) | Incorporated by reference to Registrant’s registration statement on Form N-2 Pre-Effective Amendment No. 1 (File No. 333-188280) filed on June 11, 2013. |
| (7) | Incorporated by reference to Registrant’s registration statement on Form N-2 Pre-Effective Amendment No. 2 (File No. 333-188280) filed on June 19, 2013. |
| (8) | Incorporated by reference to Registrant’s annual report on form 10-K (File No. 814-00809) filed on September 13, 2013. |
| (9) | Incorporated by reference to Registrant’s current report on Form 8-K (Item 5.03) (File No. 814-00809) filed on November 7, 2013. |
| (10) | Incorporated by reference to Registrant’s quarterly report on Form 10-Q (File No. 814-00809) filed on November 7, 2013. |
| (11) | Incorporated by reference to Registrant’s current report on Form 8-K (Items 1.01, 2.03 and 9.01) (File No. 814-00809) filed on November 7, 2013. |
| (12) | Incorporated by reference to Registrant’s current report on Form 8-K (Items 1.01, 2.03 and 9.01) (File No. 814-00809) filed on September 15, 2014. |
| (13) | Incorporated by reference to Registrant’s registration statement on Form N-2 (File No. 333-198737) filed on September 15, 2014. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | FULL CIRCLE CAPITAL CORPORATION |
Date: November 9, 2015 | | /s/ Gregg J. Felton
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif) Gregg J. Felton, Chief Executive Officer and President (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the dates indicated.
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Date: November 9, 2015 | | /s/ Michael J. Sell
![](https://capedge.com/proxy/10-Q/0001144204-15-063715/line.gif) Michael J. Sell, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
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