Garrison Capital (GARS) 10-Q 2018 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 814-00878

Garrison Capital Inc.

(Exact name of registrant as specified in its charter)

Delaware	90-0900145
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1290 Avenue of the Americas, Suite 914

NewYork, New York 10104

(Address of principal executive offices)

(212) 372-9590

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☒     No   ☐

Indicate by check mark whether the registrant has submitted electronically 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).  Yes ☐     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☐     No   ☒

As of May 4, 2018 the Registrant had 16,049,352 shares of common stock, $0.001 par value, outstanding.

Table of Contents

		Page
Part I.	Financial Information
Item 1.	Financial Statements	1
	Consolidated Statements of Financial Condition as of March 31, 2018 (unaudited) and December 31, 2017	1
	Consolidated Schedules of Investments as of March 31, 2018 (unaudited) and December 31, 2017	2
	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2018 and March 31, 2017	16
	Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2018 and March 31, 2017	17
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and March 31, 2017	18
	Notes to Consolidated Financial Statements (unaudited)	19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59
Part II.	Other Information
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	63

Garrison Capital Inc. and Subsidiaries

Consolidated Statements of Financial Condition

($ in thousands, except share and per share amounts)

Part I. Financial Information

Item 1. Financial Statements

	March 31, 2018			December 31, 2017
	(unaudited)
Assets
Cash	$	12,756		$	14,895
Restricted cash		7,814			4,621
Due from counterparties		568			4,560
Due from affiliates		—			509
Investments, at fair value
Non-control/non-affiliate investments (amortized cost of $396,045 and $395,683, respectively)		392,777			394,730
Accrued interest receivable		3,451			3,492
Other assets		5,390			1,389
Total assets	$	422,756		$	424,196
Liabilities
Due to counterparties	$	—		$	1,921
Management fee payable (Note 5)		1,492			100
Administrator fee payable (Note 5)		82			—
Senior secured revolving note (Note 4)		11,700			19,700
Senior secured term notes (Note 4)		164,562			164,511
SBIC borrowings (Note 4)		58,210			48,320
GLC Trust 2013-2 Class A note (Note 4)		—			—
Accrued interest payable		1,046			1,308
Accrued expenses and other payables		475			678
Total liabilities	$	237,567		$	236,538
Commitments and contingencies (Note 9)
Net assets
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 16,758,779 shares issued and 16,049,352 shares outstanding as of both March 31, 2018 and December 31, 2017	$	17		$	17
Paid-in-capital in excess of par		249,124			249,124
Underdistributed net investment income		4,728			4,307
Accumulated net realized loss from investments		(65,398	)		(64,821	)
Net unrealized loss from investments		(3,282	)		(969	)
Total net assets		185,189			187,658
Total liabilities and net assets	$	422,756		$	424,196
Shares of common stock outstanding		16,049,352			16,049,352
Net asset value per share	$	11.54		$	11.69

See accompanying notes to consolidated financial statements.

1

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Common Equity
Building Products
Valterra Products Holdings, LLC, Class A	N/A	N/A	N/A	N/A		185,847	$	186	$	786		0.42	%
Valterra Products Holdings, LLC, Class B	N/A	N/A	N/A	N/A		20,650		21		87		0.05
								207		873		0.47
Commercial Services and Supplies
Faraday Holdings, LLC, Common	N/A	N/A	N/A	N/A		2,752		140		320		0.17
								140		320		0.17
Healthcare Equipment and Services
Juniper TGX Investment Partners, LLC, Common	N/A	N/A	N/A	N/A		3,146		671		1,394		0.75
								671		1,394		0.75
Household Products and Durables
Oneida Group Inc., Common	N/A	N/A	N/A	N/A		242,035		2,714		1,997		1.08
								2,714		1,997		1.08
Oil, Gas and Consumable Fuels
Cochon – MWS Holdings LLC (fka Rooster Energy Ltd.), Common	N/A	N/A	N/A	N/A		99		4,112		4,112		2.22
								4,112		4,112		2.22
Transportation Services
EZE Trucking, LLC, Common	N/A	N/A	N/A	N/A		2,898		268		—		—
								268		—		—
Total Common Equity							$	8,112	$	8,696		4.69	%
Preferred Equity
Diversified Financial Services
Prosper Marketplace Series B Preferred Stock⁽¹⁾⁽²⁾	N/A	N/A	N/A	N/A		912,865	$	551	$	640		0.35	%
								551		640		0.35
Total Preferred Equity							$	551	$	640		0.35	%
Debt Investments
Aerospace and Defense
AbelConn, LLC (Atrenne Computing), Term Loan*	2.30%	8.50%	10.80%	7/17/2019		8,108	$	8,066	$	8,156		4.40	%
								8,066		8,156		4.40

See accompanying notes to consolidated financial statements.

2

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Air Freight and Logistics
Gruden Acquisition, Inc., Term Loan (First Lien)*	2.30%	5.50%	7.80%	8/18/2022		1,955	$	1,930	$	1,973		1.07	%
MXD Group, Inc. (fka Exel Direct Inc.), Term Loan*⁽³⁾	1.69%	14.00%	15.69% PIK	5/31/2018		17,599		17,515		17,709		9.56
Raymond Express International, LLC, Revolver*	1.75%	7.75%	9.50%	On Demand		40		40		40		0.02
Raymond Express International, LLC, Term Loan*	1.75%	7.75%	9.50%	On Demand		385		385		385		0.21
								19,870		20,107		10.86
Auto Components
Challenge Mfg. Company, LLC, Term Loan B*	1.88%	6.50%	8.38%	4/20/2022		8,550		8,461		8,458		4.57
FRAM Group Holdings Inc. (Autoparts Holdings), Term Loan*	1.88%	6.75%	8.63%	12/23/2021		8,438		8,312		8,480		4.58
								16,773		16,938		9.15
Building Products
Global Integrated Flooring Systems Inc. (Camino Systems, Inc.), Term Loan**	1.65%	8.25%	9.90%	2/15/2023		8,888		8,714		8,713		4.70
ShelterLogic Corp., Term Loan*	1.66%	9.50%	11.16%	7/30/2019		9,238		9,189		9,238		4.99
								17,903		17,951		9.69
Chemicals
Aristech Surfaces LLC, Term Loan B*	1.69%	7.00%	8.69%	10/17/2019		9,350		9,300		9,288		5.02
Profusion Industries, LLC, Term Loan*⁽⁵⁾	1.94%	12.25%	14.19%	6/19/2020		9,270		9,188		4,635		2.50
								18,488		13,923		7.52
Commercial Services and Supplies
Del Mar Recovery Solutions, Inc., Term Loan**	1.89%	8.50%	10.39%	6/27/2021		7,726		7,638		7,572		4.09
Interior Specialists, Inc., Term Loan*	1.69%	6.00%	7.69%	6/30/2021		9,783		9,695		9,783		5.28
VIP Cinema Holdings, Inc., Term Loan*	2.31%	6.00%	8.31%	3/1/2023		1,504		1,498		1,516		0.82
								18,831		18,871		10.19
Construction and Engineering
QualTek USA, LLC, Term Loan**	1.69%	8.00%	9.69%	11/30/2020		9,171		9,028		9,025		4.87
								9,028		9,025		4.87
Diversified Financial Services
PlanMember Financial Corporation, Term Loan*⁽¹⁾	1.75%	6.50%	8.25%	12/31/2020		1,060		1,050		1,060		0.57
								1,050		1,060		0.57
Diversified Telecommunication Services
Onvoy, LLC, Term Loan*	2.30%	4.50%	6.80%	2/10/2024		3,007		2,998		2,894		1.56
U.S. Telepacific Corp., Term Loan B*	2.30%	5.00%	7.30%	5/2/2023		5,952		5,902		5,768		3.11
								8,900		8,662		4.67

See accompanying notes to consolidated financial statements.

3

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Food Products
Diamond Crystal Brands, Inc., Term Loan**	2.31%	7.75%	10.06%	7/29/2021		5,460	$	5,422	$	5,460		2.95	%
Gold Coast Bakeries, LLC, Term Loan**⁽⁴⁾	1.89%	5.99%	7.88%	9/27/2022		6,729		6,624		6,622		3.58
Specialty Bakers LLC, Term Loan*⁽⁴⁾	1.67%	7.53%	9.20%	8/7/2019		9,539		9,483		9,443		5.10
								21,529		21,525		11.63
Healthcare Equipment and Services
ActivStyle, Inc., Term Loan***	1.75%	7.50%	9.25%	7/9/2020		10,500		10,413		10,500		5.67
Aurora Diagnostics, LLC, Delayed Draw Term Loan*	1.78%	7.13%	8.91%	7/31/2019		850		848		850		0.46
Aurora Diagnostics, LLC, Delayed Draw Term Loan B*	1.78%	7.13%	8.91%	7/31/2019		598		596		598		0.32
Aurora Diagnostics, LLC, Delayed Draw Term Loan C*	1.89%	7.13%	9.02%	7/31/2019		1,056		1,042		1,056		0.57
Aurora Diagnostics, LLC, Delayed Draw Term Loan D	2.11%	7.13%	9.24%	7/31/2019		173		171		173		0.09
Aurora Diagnostics, LLC, Revolver*	1.78%	7.13%	8.91%	7/31/2019		714		717		714		0.39
Aurora Diagnostics, LLC, Term Loan*	1.78%	7.13%	8.91%	7/31/2019		5,358		5,342		5,358		2.89
Community Care Health Network, LLC, Term Loan*	1.99%	4.75%	6.74%	2/16/2025		1,400		1,396		1,408		0.76
Maxor Acquisition, Inc., Revolver*	1.60%	6.00%	7.60%	11/22/2022		73		73		73		0.04
Maxor Acquisition, Inc., Term Loan*	2.25%	6.00%	8.25%	11/22/2023		9,012		8,928		8,927		4.82
RCS Management Corporation (SMS), Term Loan B**	1.81%	10.50%	12.31%	7/29/2018		9,500		9,469		9,469		5.11
Theragenics Corporation, Term Loan**	2.31%	12.00%	14.31%	12/23/2020		10,357		10,226		10,357		5.59
								49,221		49,483		26.71
Hotels, Restaurants and Leisure
AP Gaming I, LLC, Term Loan B*⁽¹⁾	1.88%	4.25%	6.13%	2/15/2024		9,925		9,903		10,037		5.42
CircusTrix Holdings, LLC, Term Loan B*	2.31%	5.50%	7.81%	12/16/2021		6,031		5,973		5,972		3.22
HRI Holding Corp. (Houlihans Restaurants), Term Loan*⁽⁴⁾	2.31%	7.24%	9.55%	12/17/2020		6,534		6,460		6,208		3.35
								22,336		22,217		11.99
Household Products and Durables
Brown Jordan International Inc., Term Loan*	2.30%	5.00%	7.30%	1/31/2023		5,878		5,841		5,908		3.19
CR Brands, Inc., Term Loan*⁽³⁾	1.67%	9.25% Cash + 2.00% PIK	12.92%	6/30/2018		9,775		9,787		9,774		5.28
Lexmark Carpet Mills, Inc., Term Loan*⁽³⁾	1.69%	10.00% Cash + 1.00% PIK	12.69%	12/19/2019		8,599		8,526		8,525		4.60
NBG Acquisition Inc., Term Loan*	2.45%	5.50%	7.95%	4/26/2024		5,291		5,219		5,285		2.85
University Furnishings, L.P., Term Loan***⁽⁴⁾	1.73%	7.33%	9.06%	10/13/2022		9,500		9,383		9,500		5.13
								38,756		38,992		21.05

See accompanying notes to consolidated financial statements.

4

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Internet Software and Services
Aptos, Inc., Term Loan B*	2.30%	6.75%	9.05%	9/1/2022		8,797	$	8,668	$	8,666		4.68	%
Dodge Data & Analytics LLC, Term Loan*	1.75%	8.75%	10.50%	10/31/2019		8,498		8,444		8,444		4.56
Emtec Global Services Holdings, LLC, Revolver⁽³⁾	1.63%	8.25% Cash + 4.00% PIK	13.88%	11/30/2020		369		376		369		0.20
Emtec Global Services Holdings, LLC, Term Loan**⁽³⁾	1.63%	8.25% Cash + 4.00% PIK	13.88%	11/30/2020		3,048		3,028		2,744		1.48
Exela Intermediate LLC, Term Loan*⁽¹⁾	2.07%	7.50%	9.57%	7/12/2023		5,100		5,011		5,136		2.77
Lionbridge Technologies, Inc., Term Loan*	1.88%	5.50%	7.38%	2/28/2024		1,415		1,409		1,410		0.76
Newscycle Solutions, Inc., Delayed Draw Term Loan	1.66%	7.00%	8.66%	12/29/2022		822		822		807		0.44
Newscycle Solutions, Inc., Term Loan*	1.89%	7.00%	8.89%	12/29/2022		8,992		8,821		8,820		4.76
RA Outdoors LLC (Active Network), Term Loan*	1.79%	4.75%	6.54%	9/11/2024		7,943		7,867		7,867		4.25
Vero Parent, Inc. (fka Syncsort Incorporated), Initial Term Loan (First Lien)*	2.30%	5.00%	7.30%	8/16/2024		8,955		8,844		8,955		4.84
								53,290		53,218		28.74
Leisure Products
Bass Pro Group, LLC, Initial Term Loan*	1.88%	5.00%	6.88%	9/25/2024		5,721		5,686		5,664		3.06
Confluence Outdoor, LLC, Delayed Draw Term Loan*	1.66%	8.75%	10.41%	4/18/2019		955		952		946		0.51
Confluence Outdoor, LLC, Term Loan*	1.66%	8.75%	10.41%	4/18/2019		6,368		6,344		6,304		3.40
Kranos Acquisition Corp., Term Loan*⁽³⁾	1.69%	11.00% Cash + 1.00% PIK	13.69%	5/16/2018		7,243		7,270		7,149		3.86
Playpower, Inc., Initial Term Loan (First Lien)*	2.30%	4.75%	7.05%	6/23/2021		955		964		955		0.52
								21,216		21,018		11.35
Media
Project Sunshine IV Pty Ltd, 2017 Incremental Term Loan*⁽¹⁾	1.88%	7.00%	8.88%	8/22/2022		7,416		7,319		7,416		4.00
								7,319		7,416		4.00
Pharmaceuticals
RiteDose Holdings I, Inc., Revolver*	2.25%	6.50%	8.75%	9/13/2023		286		286		282		0.15
RiteDose Holdings I, Inc., Term Loan*	1.69%	6.50%	8.19%	9/13/2023		8,037		7,928		7,926		4.28
								8,214		8,208		4.43

See accompanying notes to consolidated financial statements.

5

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Professional Services
Censeo Health LLC (Chloe Ox Parent, LLC), Term Loan*	2.30%	5.00%	7.30%	12/21/2024		1,889	$	1,871	$	1,908		1.03	%
								1,871		1,908		1.03
Technology Hardware, Storage and Peripherals
Elo Touch Solutions, Inc., Term Loan B*	2.00%	6.00%	8.00%	10/31/2023		5,932		5,877		5,913		3.19
Table Top Media, LLC, Lease**	N/A	10.00%	10.00%	10/15/2019		2,429		2,424		2,427		1.31
								8,301		8,340		4.50
Textiles, Apparel and Luxury Goods
League Collegiate Holdings, LLC, Term Loan*	1.89%	8.00%	9.89%	6/28/2021		7,219		7,149		7,291		3.94
Triangle Home Fashions, LLC, Term Loan**⁽⁴⁾	1.72%	6.94%	8.66%	3/9/2023		10,500		10,319		10,318		5.57
								17,468		17,609		9.51
Trading Companies and Distributors
Sprint Industrial Holdings, LLC, Term Loan (First Lien)*	2.30%	5.75%	8.05%	5/14/2019		4,712		4,705		4,418		2.39
								4,705		4,418		2.39
Transportation Services
Jack Cooper Holdings Corp., Term Loan	3.00%	7.00%	10.00%	10/18/2018		5,000		5,035		5,036		2.72
PS Holdco, LLC, Term Loan*	2.09%	5.25%	7.34%	3/6/2025		2,220		2,209		2,236		1.21
Sirva Worldwide, Term Loan*	1.84%	6.50%	8.34%	11/22/2022		5,659		5,550		5,687		3.07
								12,794		12,959		7.00
Total Debt Investments							$	385,929	$	382,004		206.25	%
Financial Assets
Diversified Financial Services
GLC Trust 2013-2 Consumer Loan Pool⁽¹⁾⁽⁶⁾	N/A	N/A	N/A	N/A		1,536	$	1,536	$	1,459		0.79	%
								1,536		1,459		0.79
Total Financial Assets							$	1,536	$	1,459		0.79	%

See accompanying notes to consolidated financial statements.

6

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost			Fair Value			% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Unfunded Commitments
Air Freight and Logistics
Raymond Express International, LLC, Revolver*	N/A	0.50%	0.50%	On Demand		175	$	—		$	—			—	%
								—			—			—
Building Products
Global Integrated Flooring Systems Inc. (Camino Systems, Inc.), Revolver⁽⁷⁾	N/A	0.75%	0.75%	2/15/2023		50		—			(1	)		—
								—			(1	)		—
Commercial Services and Supplies
Del Mar Recovery Solutions, Inc., Revolver	N/A	0.75%	0.75%	6/27/2021		990		(11	)		—			—
								(11	)		—			—
Healthcare Equipment and Services
Aurora Diagnostics, LLC, Delayed Draw Term Loan D	N/A	3.00%	3.00%	7/31/2019		506		(12	)		—			—
Aurora Diagnostics, LLC, Revolver*	N/A	0.38%	0.38%	7/31/2019		306		(3	)		—			—
Maxor Acquisition, Inc., Revolver*⁽⁷⁾	N/A	0.50%	0.50%	11/22/2022		512		(5	)		(5	)		—
								(20	)		(5	)		—
Internet Software and Services
Emtec Global Services Holdings, LLC, Revolver	N/A	0.00%	0.00%	11/30/2020		218		(11	)		—			—
Newscycle Solutions, Inc., Revolver⁽⁷⁾	N/A	0.50%	0.50%	12/29/2022		685		(13	)		(13	)		(0.01	)
								(24	)		(13	)		(0.01	)
Pharmaceuticals
RiteDose Holdings I, Inc., Revolver*⁽⁷⁾	N/A	0.50%	0.50%	9/13/2023		251		(7	)		(3	)		—
								(7	)		(3	)		—
Textiles, Apparel and Luxury Goods
League Collegiate Holdings, LLC, Revolver	N/A	0.75%	0.75%	6/28/2021		2,200		(21	)		—			—
								(21	)		—			—
Total Unfunded Commitments							$	(83	)	$	(22	)		(0.01	)%
Total Non-Control/Non-Affiliate Investments							$	396,045		$	392,777			212.07	%
Total Investments - United States							$	396,045		$	392,777			212.07	%

See accompanying notes to consolidated financial statements.

7

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments - (continued)

March 31, 2018 (unaudited)

($ in thousands, except share amounts)

* Denotes that all or a portion of the investment is held as collateral by Garrison Funding 2016-2 Ltd.

** Denotes that all or a portion of the loan is held by Garrison Capital SBIC LP.

*** Denotes that all or a portion of the loan is held as collateral by both Garrison Funding 2016-2 Ltd. and Garrison Capital SBIC LP.

Base Rate = Our floating rate investments bear interest at a base rate plus a spread. Generally, the borrower has an option to choose whether the base rate is referenced to the London Interbank Offered Rate (“LIBOR”) or the prime rate. The spread may change as a result of the borrower’s choice of base rate. In addition, the floating rate investments that are referenced to LIBOR are generally indexed to 30-day or 90-day U.S. Dollar LIBOR and subject to a minimum LIBOR Floor. The terms disclosed in the consolidated schedule of investments represent the actual base rate and spread in effect as of the reporting date.

All securities above were valued with significant unobservable inputs. Refer to Note 3 of our consolidated financial statements for additional disclosures regarding the unobservable inputs used in fair value measurement.

(1) Not a qualifying asset under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”).  Under the 1940 Act, Garrison Capital Inc. (the “Company”) may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets. As of March 31, 2018, 93.9% of the Company’s assets were qualifying assets.

(2) Net of a profits interest payable to a third party upon any subsequent sales of Prosper Marketplace Series B Preferred Stock.

(3) Interest is payable in cash, and/or payment-in-kind (“PIK”), or a combination thereof.

(4) In addition to the interest earned on the stated base rate and spread of this investment, the Company received additional interest during the three months ended March 31, 2018 due to an arrangement between the Company and certain other lenders to the portfolio company. The additional interest received during the quarter has been annualized and included in the spread disclosed for this investment.

(5) Investment is currently not income producing and placed on non-accrual status.

(6) GLC Trust 2013-2 includes 461 small balance consumer loans with an average par of $3,331, a weighted average rate of 16.13% and a weighted average maturity of March 1, 2019. See Note 3 for additional information. See Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 for detail on underlying loans.

(7) The negative fair value is the result of the unfunded commitments being valued below par. These amounts may or may not be funded to the borrowing party currently or in the future.

As required by the 1940 Act, investments are classified by level of control. “Control Investments” are investments in those companies that the Company is deemed to control as defined in the 1940 Act. “Affiliate Investments” are investments in those companies that are affiliated companies, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.

Generally, under the 1940 Act, the Company is deemed to control a company in which it has invested if it owns more than 25% of the voting securities of such company. The Company is deemed to be an affiliate of a company in which it has invested if it owns 5% or more of the voting securities of such company.

All debt investments were income producing as of March 31, 2018, unless otherwise noted. Common and preferred equity investments are non income-producing unless otherwise noted.

See accompanying notes to consolidated financial statements.

8

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Common Equity
Building Products
Valterra Products Holdings, LLC, Class A	N/A	N/A	N/A	N/A		185,847	$	186	$	786		0.42	%
Valterra Products Holdings, LLC, Class B	N/A	N/A	N/A	N/A		20,650		21		87		0.05
								207		873		0.47
Commercial Services and Supplies
Faraday Holdings, LLC, Common	N/A	N/A	N/A	N/A		2,752		140		320		0.17
								140		320		0.17
Healthcare Equipment and Services
Juniper TGX Investment Partners, LLC, Common	N/A	N/A	N/A	N/A		3,146		671		1,394		0.74
								671		1,394		0.74
Household Products and Durables
Oneida Group Inc. (fka Everyware Global, Inc.), Common	N/A	N/A	N/A	N/A		242,035		2,714		1,997		1.06
								2,714		1,997		1.06
Transportation Services
EZE Trucking, LLC, Common	N/A	N/A	N/A	N/A		2,898		268		—		—
								268		—		—
Total Common Equity							$	4,000	$	4,584		2.44	%
Preferred Equity
Diversified Financial Services
Prosper Marketplace Series B Preferred Stock⁽¹⁾⁽²⁾	N/A	N/A	N/A	N/A		912,865	$	551	$	640		0.34	%
								551		640		0.34
Total Preferred Equity							$	551	$	640		0.34	%
Debt Investments
Aerospace and Defense
AbelConn, LLC (Atrenne Computing), Term Loan*	1.69%	8.50%	10.19%	7/17/2019		8,203	$	8,153	$	8,203		4.37	%
								8,153		8,203		4.37

See accompanying notes to consolidated financial statements.

9

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Air Freight and Logistics
Gruden Acquisition, Inc., Term Loan (First Lien)*	1.69%	5.50%	7.19%	8/18/2022		1,960	$	1,933	$	1,958		1.04	%
MXD Group, Inc. (fka Exel Direct Inc.), Term Loan*⁽³⁾	1.38%	14.00%	15.38% PIK	5/31/2018		16,932		16,836		17,049		9.09
Raymond Express International, LLC, Revolver*	1.75%	7.75%	9.50%	2/28/2018		40		40		40		0.02
Raymond Express International, LLC, Term Loan*	1.75%	7.75%	9.50%	2/28/2018		385		385		385		0.21
								19,194		19,432		10.36
Auto Components
Challenge Mfg. Company, LLC, Term Loan B*	1.57%	7.00%	8.57%	4/20/2022		8,663		8,567		8,565		4.56
FRAM Group Holdings Inc. (Autoparts Holdings), Term Loan*	1.57%	6.75%	8.32%	12/23/2021		8,550		8,414		8,614		4.59
								16,981		17,179		9.15
Building Products
ShelterLogic Corp., Term Loan*	1.36%	9.50%	10.86%	7/30/2019		9,356		9,297		9,356		4.99
								9,297		9,356		4.99
Chemicals
Aristech Surfaces LLC, Term Loan B*	1.38%	7.00%	8.38%	10/17/2019		9,410		9,351		9,336		4.98
Profusion Industries, LLC, Term Loan*	1.63%	12.25%	13.88%	6/19/2020		9,270		9,179		8,621		4.59
								18,530		17,957		9.57
Commercial Services and Supplies
Del Mar Recovery Solutions, Inc., Term Loan**	1.57%	8.50%	10.07%	6/27/2021		7,726		7,632		7,572		4.04
Interior Specialists, Inc., Term Loan*	1.38%	6.00%	7.38%	6/30/2021		9,832		9,734		9,832		5.24
VIP Cinema Holdings, Inc., Term Loan*	1.70%	6.00%	7.70%	3/1/2023		1,524		1,517		1,533		0.82
								18,883		18,937		10.10
Construction and Engineering
QualTek USA, LLC, Term Loan**	1.37%	8.00%	9.37%	11/30/2020		9,287		9,129		9,128		4.86
								9,129		9,128		4.86
Diversified Financial Services
PlanMember Financial Corporation, Term Loan*⁽¹⁾	1.50%	6.50%	8.00%	12/31/2020		1,079		1,068		1,079		0.58
								1,068		1,079		0.58
Diversified Telecommunication Services
Onvoy, LLC, Term Loan*	1.69%	4.50%	6.19%	2/10/2024		3,014		3,005		2,547		1.36
U.S. Telepacific Corp., Term Loan B*	1.69%	5.00%	6.69%	5/2/2023		5,967		5,915		5,699		3.04
								8,920		8,246		4.40

See accompanying notes to consolidated financial statements.

10

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Food Products
Diamond Crystal Brands, Inc., Term Loan**	1.70%	7.75%	9.45%	7/29/2021		5,460	$	5,419	$	5,460		2.91	%
Gold Coast Bakeries, LLC, Term Loan**⁽⁴⁾	1.57%	6.02%	7.59%	9/27/2022		6,729		6,618		6,617		3.53
Specialty Bakers LLC, Term Loan*⁽⁴⁾	1.37%	7.88%	9.25%	8/7/2019		9,539		9,473		9,443		5.03
								21,510		21,520		11.47
Healthcare Equipment and Services
ActivStyle, Inc., Term Loan**	1.38%	9.00%	10.38%	7/9/2020		8,311		8,237		8,311		4.43
Aurora Diagnostics, LLC, Delayed Draw Term Loan*	1.39%	7.13%	8.52%	7/31/2019		850		848		850		0.45
Aurora Diagnostics, LLC, Delayed Draw Term Loan B*	1.39%	7.13%	8.52%	7/31/2019		598		596		598		0.32
Aurora Diagnostics, LLC, Delayed Draw Term Loan C*	1.47%	7.13%	8.60%	7/31/2019		610		610		610		0.33
Aurora Diagnostics, LLC, Revolver*	1.66%	7.13%	8.79%	7/31/2019		544		543		544		0.29
Aurora Diagnostics, LLC, Term Loan*	1.39%	7.13%	8.52%	7/31/2019		5,387		5,369		5,387		2.87
Maxor Acquisition, Inc., Revolver*	1.59%	6.00%	7.59%	11/22/2022		66		66		65		0.03
Maxor Acquisition, Inc., Term Loan*	1.66%	6.00%	7.66%	11/22/2023		9,035		8,946		8,946		4.77
RCS Management Corporation (SMS), Term Loan B**	1.49%	10.50%	11.99%	7/29/2018		9,500		9,446		9,445		5.03
Theragenics Corporation, Term Loan**	1.70%	12.00%	13.70%	12/23/2020		8,217		8,122		8,217		4.38
								42,783		42,973		22.90
Hotels, Restaurants and Leisure
AP Gaming I, LLC, Term Loan B*	1.57%	5.50%	7.07%	2/15/2024		9,950		9,928		10,018		5.34
HRI Holding Corp. (Houlihans Restaurants), Term Loan*⁽⁴⁾	1.70%	7.54%	9.24%	12/17/2020		6,725		6,642		6,389		3.40
								16,570		16,407		8.74
Household Products and Durables
Brown Jordan International Inc., Term Loan*	1.69%	5.00%	6.69%	1/31/2023		5,893		5,853		5,893		3.14
CR Brands, Inc., Term Loan*⁽³⁾	1.37%	11.25%	12.62% PIK	6/30/2018		9,635		9,635		9,634		5.13
Lexmark Carpet Mills, Inc., Term Loan*⁽³⁾	1.34%	10.00% Cash + 1.00% PIK	12.34%	12/19/2019		8,714		8,629		8,629		4.60
NBG Acquisition Inc., Term Loan*	1.69%	5.50%	7.19%	4/26/2024		5,325		5,249		5,365		2.86
University Furnishings, L.P., Term Loan***⁽⁴⁾	1.36%	7.70%	9.06%	10/13/2022		9,500		9,377		9,500		5.06
								38,743		39,021		20.79

See accompanying notes to consolidated financial statements.

11

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Internet Software and Services
Aptos, Inc., Term Loan B*	1.69%	6.75%	8.44%	9/1/2022		8,854	$	8,716	$	8,721		4.65	%
ASG Technologies Group, Inc., Term Loan*	1.57%	4.75%	6.32%	7/31/2024		1,392		1,385		1,406		0.75
Dodge Data & Analytics LLC, Term Loan*	1.38%	8.75%	10.13%	10/31/2019		8,629		8,570		8,566		4.56
Emtec Global Services Holdings, LLC, Revolver⁽³⁾	1.35%	8.25% Cash + 4.00% PIK	13.60%	11/30/2020		353		353		353		0.19
Emtec Global Services Holdings, LLC, Term Loan**⁽³⁾	1.35%	8.25% Cash + 4.00% PIK	13.60%	11/30/2020		2,954		2,932		2,659		1.42
Exela Intermediate LLC, Term Loan*⁽¹⁾	1.36%	7.50%	8.86%	7/12/2023		5,132		5,038		4,972		2.65
Lionbridge Technologies, Inc., Term Loan*	1.57%	5.50%	7.07%	2/28/2024		1,419		1,412		1,414		0.75
Newscycle Solutions, Inc., Term Loan*	1.57%	7.00%	8.57%	12/29/2022		8,992		8,813		8,812		4.70
RA Outdoors LLC (Active Network), Term Loan*	1.46%	4.75%	6.21%	9/11/2024		7,963		7,883		7,884		4.20
Vero Parent, Inc. (fka Syncsort Incorporated), Initial Term Loan (First Lien)*	1.69%	5.00%	6.69%	8/16/2024		8,978		8,863		8,753		4.66
								53,965		53,540		28.53
Leisure Products
Bass Pro Group, LLC, Initial Term Loan*	1.57%	5.00%	6.57%	9/25/2024		5,736		5,699		5,714		3.04
Confluence Outdoor, LLC, Delayed Draw Term Loan*	1.36%	8.75%	10.11%	4/18/2019		999		994		989		0.53
Confluence Outdoor, LLC, Term Loan*	1.36%	8.75%	10.11%	4/18/2019		6,657		6,627		6,590		3.51
Kranos Acquisition Corp., Term Loan*	1.38%	10.00%	11.38%	4/30/2018		7,506		7,525		7,408		3.95
Playpower, Inc., Initial Term Loan (First Lien)*	1.69%	4.75%	6.44%	6/23/2021		957		963		960		0.51
								21,808		21,661		11.54
Machinery
Texas Hydraulics Holding, Inc., Term Loan**⁽⁴⁾	1.57%	9.34%	10.91%	2/17/2021		8,200		8,097		8,200		4.37
								8,097		8,200		4.37
Media
Project Sunshine IV Pty Ltd, 2017 Incremental Term Loan*⁽¹⁾	1.57%	7.00%	8.57%	8/22/2022		8,568		8,469		8,569		4.57
								8,469		8,569		4.57
Metals and Mining
Metal Services LLC (Phoenix), New Term Loans*	1.69%	7.50%	9.19%	6/30/2019		6,019		5,978		6,042		3.22
								5,978		6,042		3.22
Retailing
Western Convenience Stores, Inc., Term Loan*	1.38%	11.00%	12.38%	9/1/2019		9,000		8,850		9,000		4.80
								8,850		9,000		4.80

See accompanying notes to consolidated financial statements.

12

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares			Cost		Fair Value		% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Oil, Gas and Consumable Fuels
Diversified Gas & Oil Corporation, Term Loan*⁽⁴⁾	1.57%	9.45%	11.02%	6/30/2020		5,799		$	5,784	$	5,735		3.06	%
Rooster Energy Ltd., Term Loan*⁽³⁾⁽⁴⁾⁽⁵⁾	1.50%	12.58% Cash + 8.00% PIK	22.08%	6/25/2018		5,474			4,988		4,112		2.19
									10,772		9,847		5.25
Pharmaceuticals
RiteDose Holdings I, Inc., Term Loan*	1.34%	6.50%	7.84%	9/13/2023		8,058			7,943		7,941		4.23
									7,943		7,941		4.23
Professional Services
Censeo Health LLC, Term Loan*	1.64%	5.00%	6.64%	12/21/2024		1,889			1,871		1,889		1.01
									1,871		1,889		1.01
							��
Technology Hardware, Storage and Peripherals
Elo Touch Solutions, Inc., Term Loan B*	1.44%	6.00%	7.44%	10/31/2023		6,333			6,272		6,266		3.34
Table Top Media, LLC, Lease**	N/A	10.00%	10.00%	10/15/2019		2,834			2,827		2,831		1.51
									9,099		9,097		4.85
Textiles, Apparel and Luxury Goods
League Collegiate Holdings, LLC, Term Loan*	1.58%	8.00%	9.58%	6/28/2021		7,315			7,238		7,233		3.85
									7,238		7,233		3.85
Trading Companies and Distributors
Sprint Industrial Holdings, LLC, Term Loan (First Lien)*	1.69%	5.75%	7.44%	5/14/2019		4,725			4,716		4,359		2.32
									4,716		4,359		2.32
Transportation Services
Jack Cooper Holdings Corp., Term Loan	3.00%	7.00%	10.00%	10/18/2018		5,000			5,050		5,052		2.69
Sirva Worldwide, Term Loan*	1.49%	6.50%	7.99%	11/22/2022		5,659			5,544		5,687		3.03
									10,594		10,739		5.72
Total Debt Investments								$	389,161	$	387,555		206.54	%
Financial Assets
Diversified Financial Services
GLC Trust 2013-2 Consumer Loan Pool⁽¹⁾⁽⁶⁾	N/A	N/A	N/A	N/A		2,165		$	2,165	$	2,026		1.08	%
									2,165		2,026		1.08
Total Financial Assets								$	2,165	$	2,026		1.08	%

See accompanying notes to consolidated financial statements.

13

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

Security Description	Base Rate	Spread	All In Rate	Maturity	Par / Shares		Cost			Fair Value			% of Net Assets
Non-Control/Non-Affiliate Investments
Investments - United States
Debt Investments (continued)
Unfunded Commitments
Air Freight and Logistics
Raymond Express International, LLC, Revolver*	N/A	0.50%	0.50%	2/28/2018		175	$	—		$	—			—	%
								—			—			—
Commercial Services and Supplies
Del Mar Recovery Solutions, Inc., Revolver	N/A	0.75%	0.75%	6/27/2021		990		(12	)		—			—
								(12	)		—			—
Healthcare Equipment and Services
Aurora Diagnostics, LLC, Delayed Draw Term Loan C*	N/A	2.25%	2.25%	7/31/2019		446		(16	)		—			—
Aurora Diagnostics, LLC, Delayed Draw Term Loan D	N/A	3.00%	3.00%	12/12/2018		677		(16	)		—			—
Aurora Diagnostics, LLC, Revolver*	N/A	0.38%	0.38%	7/31/2019		476		(3	)		—			—
Maxor Acquisition, Inc., Revolver*⁽⁷⁾	N/A	0.50%	0.50%	11/22/2022		519		(6	)		(5	)		—
								(41	)		(5	)		—
Internet Software and Services
Emtec Global Services Holdings, LLC, Revolver	N/A	0.00%	0.00%	11/30/2020		219		(4	)		—			—
Newscycle Solutions, Inc., Delayed Draw Term Loan⁽⁷⁾	N/A	2.00%	2.00%	12/29/2022		822		—			(16	)		(0.01	)
Newscycle Solutions, Inc., Revolver⁽⁷⁾	N/A	0.50%	0.50%	12/29/2022		685		(14	)		(14	)		(0.01	)
								(18	)		(30	)		(0.02	)
Oil, Gas and Consumable Fuels
Diversified Gas & Oil Corporation, Term Loan*⁽⁷⁾	N/A	3.00%	3.00%	6/30/2020		792		(92	)		(7	)		—
Morrison Well Services, LLC, Revolver	N/A	0.00%	0.00%	1/31/2018		198		—			—			—
								(92	)		(7	)		—
Pharmaceuticals
RiteDose Holdings I, Inc., Revolver*⁽⁷⁾	N/A	0.50%	0.50%	9/13/2023		537		(8	)		(8	)		—
								(8	)		(8	)		—
Textiles, Apparel and Luxury Goods
League Collegiate Holdings, LLC, Revolver*⁽⁷⁾	N/A	0.75%	0.75%	6/28/2021		2,200		(23	)		(25	)		(0.01	)
								(23	)		(25	)		(0.01	)
Total Unfunded Commitments							$	(194	)	$	(75	)		(0.03	)%
Total Non-Control/Non-Affiliate Investments							$	395,683		$	394,730			210.37	%
Total Investments - United States							$	395,683		$	394,730			210.37	%

See accompanying notes to consolidated financial statements.

14

Garrison Capital Inc. and Subsidiaries

Consolidated Schedule of Investments – (continued)

December 31, 2017

($ in thousands, except share amounts)

* Denotes that all or a portion of the investment is held as collateral by Garrison Funding 2016-2 Ltd.

** Denotes that all or a portion of the loan is held by Garrison Capital SBIC LP.

*** Denotes that all or a portion of the investment is held as collateral by both Garrison Funding 2016-2 Ltd. and Garrison Capital SBIC LP.

Base Rate = Our floating rate investments bear interest at a base rate plus a spread. Generally, the borrower has an option to choose whether the base rate is referenced to LIBOR or the prime rate. The spread may change as a result of the borrower’s choice of base rate. In addition, the floating rate investments that are referenced to LIBOR are generally indexed to 30-day or 90-day U.S. Dollar LIBOR and subject to a minimum LIBOR Floor. The terms disclosed in the consolidated schedule of investments represent the actual base rate and spread in effect as of the reporting period date.

All securities above were valued with significant unobservable inputs. Refer to Note 3 of our consolidated financial statements for additional disclosures regarding the unobservable inputs used in fair value measurement.

(1) Not a qualifying asset under Section 55(a) of the 1940 Act.  Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2017, 95.9% of the Company’s assets were qualifying assets.

(2) Net of a profits interest payable to a third party upon any subsequent sales of Prosper Marketplace Series B Preferred Stock.

(3) Interest is payable in cash, and/or PIK, or a combination thereof.

(4) In addition to the interest earned on the stated base rate and spread of this investment, the Company received additional interest for the year ended December 31, 2017 due to an arrangement between the Company and certain other lenders to the portfolio company. The additional interest received during the quarter has been annualized and included in the spread disclosed for this investment.

(5) Investment is currently not income producing and placed on non-accrual status.

(6) GLC Trust 2013-2 includes 516 small balance consumer loans with an average par of $4,196, a weighted average rate of 16.17% and a weighted average maturity of February 19, 2019. See Note 3 for additional information. See Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for detail on underlying loans.

(7) The negative fair value is the result of the unfunded commitments being valued below par. These amounts may or may not be funded to the borrowing party currently or in the future.

As required by the 1940 Act, investments are classified by level of control. “Control Investments” are investments in those companies that the Company is deemed to control as defined in the 1940 Act. “Affiliate Investments” are investments in those companies that are affiliated companies, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.

Generally, under the 1940 Act, the Company is deemed to control a company in which it has invested if it owns more than 25% of the voting securities of such company. The Company is deemed to be an affiliate of a company in which it has invested if it owns 5% or more of the voting securities of such company.

All debt investments were income producing as of December 31, 2017, unless otherwise noted. Common and preferred equity investments are non income-producing unless otherwise noted.

See accompanying notes to consolidated financial statements.

15

Garrison Capital Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

($ in thousands, except share and per share amounts)

	Three Months Ended			Three Months Ended
	March 31, 2018			March 31, 2017
Investment income
Interest income
Non-control/non-affiliate investments	$	8,360		$	8,155
Non-control/affiliate investments		—			148
Payment-in-kind		1,219			273
Other income		642			418
Total investment income		10,221			8,994
Expenses
Interest expense		2,554			2,110
Management fee		1,492			1,611
Incentive fee		—			—
Professional fees		294			319
Directors' fees		77			82
Administrator expenses		298			224
Other expenses		586			674
Total expenses		5,301			5,020
Management fee waived		—			(230	)
Net expenses		5,301			4,790
Net investment income before excise taxes		4,920			4,204
Excise tax expense/(benefit)		6			17
Net investment income		4,914			4,187
Realized and unrealized gain/(loss) on investments
Net realized (loss)/gain on investments
Non-control/non-affiliate investments		(577	)		204
Non-control/affiliate investments		—			—
Net change in unrealized loss on investments
Non-control/non-affiliate investments		(2,312	)		(5,110	)
Non-control/affiliate investments		—			(3,269	)
Net realized and unrealized loss on investments		(2,889	)		(8,175	)
Net increase/(decrease) in net assets resulting from operations	$	2,025		$	(3,988	)
Net investment income per common share	$	0.31		$	0.26
Net increase/(decrease) in net assets resulting from operations per common share	$	0.13		$	(0.24	)
Basic weighted average common shares outstanding		16,049,352			16,049,352
Dividends and distributions declared per common share	$	0.28		$	0.28

See accompanying notes to consolidated financial statements.

16

Garrison Capital Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets (unaudited)

($ in thousands, except share and per share amounts)

	Three Months Ended			Three Months Ended
	March 31, 2018			March 31, 2017
Increase/(decrease) in net assets from operations:
Net investment income	$	4,914		$	4,187
Net realized (loss)/gain on investments		(577	)		204
Net change in unrealized loss on investments		(2,312	)		(8,379	)
Net increase/(decrease) in net assets resulting from operations		2,025			(3,988	)
Dividends and distributions to stockholders:
From net investment income		(4,494	)		(4,495	)
Total dividends and distributions to stockholders		(4,494	)		(4,495	)
Total decrease in net assets		(2,469	)		(8,483	)
Net assets at beginning of period		187,658			199,408
Net assets at end of period	$	185,189		$	190,925
Net asset value per share	$	11.54		$	11.90
Shares of common stock outstanding at end of period		16,049,352			16,049,352
Underdistributed net investment income included in net assets	$	4,728		$	4,857

See accompanying notes to consolidated financial statements.

17

Garrison Capital Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

($ in thousands, except share and per share amounts)

	Three Months Ended			Three Months Ended
	March 31, 2018			March 31, 2017
Cash flows from operating activities
Net increase/(decrease) in net assets resulting from operations	$	2,025		$	(3,988	)
Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by operating activities:
Net accretion of discounts on investments		(339	)		(377	)
Net realized loss/(gain) on investments		577			(204	)
Amortization of deferred debt issuance costs and discounts on notes payable		90			127
Net change in unrealized loss on investments		2,312			8,379
Payment-in-kind interest		(938	)		(273	)
Purchases of investments		(35,811	)		(28,326	)
Paydowns of investments		34,758	��		38,757
Sales of investments		1,395			—
Changes in operating assets and liabilities:
(Increase)/decrease in due from counterparties		(378	)		1,247
Decrease in due from affiliates		509			—
Decrease in accrued interest receivable		41			1,022
Decrease in other assets		267			260
(Decrease)/increase in due to counterparties		(1,921	)		—
Increase in payables to affiliates		1,474			1,381
Decrease in accrued interest payable		(262	)		(262	)
Decrease in accrued expenses and other payables		(204	)		(35	)
Net cash provided by operating activities		3,595			17,708
Cash flows from financing activities
Distributions paid to stockholders		(4,494	)		(4,495	)
Payments for financing costs		(247	)		—
Repayment of senior secured revolving note		(8,000	)		—
Repayment of GLC Trust 2013-2 Class A note		—			(1,942	)
Proceeds from Garrison SBIC borrowings		10,200			—
Net cash used in financing activities		(2,541	)		(6,437	)
Net increase in cash and restricted cash		1,054			11,271
Cash and restricted cash at beginning of period		19,516			22,946
Cash and restricted cash at end of period	$	20,570		$	34,217
Supplemental disclosure of cash flow information
Cash paid for interest expense	$	2,956		$	2,245
Supplemental disclosure of non-cash activities
Restructuring of portfolio investment	$	4,112		$	—

See accompanying notes to consolidated financial statements.

18

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

1. Organization

Garrison Capital Inc. (“GARS” and, collectively with its subsidiaries, the “Company”, “we” or “our”) is a Delaware corporation and is an externally managed, closed-end, non-diversified management investment company that has filed an election to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, GARS has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for the period beginning October 9, 2012 and intends to qualify annually thereafter. GARS’ shares trade on the Nasdaq Global Select Market under the symbol “GARS”.

Our investment objective is to generate current income and capital appreciation through direct loans and debt investments in U.S. based middle-market companies. Our loans and debt investments are primarily first lien senior secured loans (including "unitranche" loans, which are loans that combine the characteristics of both senior and subordinated debt, generally in a first lien position). We also may, to a lesser extent, invest in subordinated and mezzanine debt, unsecured consumer loans and equity investments. Our goal is to generate attractive risk-adjusted returns by assembling a broad portfolio of investments.

The Company’s business and affairs are managed and controlled by the Company’s board of directors (the “Board”). The majority of the members of the Board are independent of the Company and its affiliates. Our investment activities and day-to-day operations are managed by Garrison Capital Advisers, LLC (our “Investment Adviser”), and Garrison Capital Administrator, LLC (the “GARS Administrator”) provides the Company with certain administrative services necessary to conduct our day-to-day operations. We are organized as a holding company and conduct our business primarily through our various subsidiaries.

2. Significant Accounting Policies and Recent Updates

Basis of Presentation

The Company is an investment company as defined in the accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 — Financial Services —  Investment Companies (“ASC Topic 946”).

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications consisting solely of normal accruals that are necessary for the fair presentation of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation, including, but not limited to, the presentation of PIK interest.

19

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Principles of Consolidation

The consolidated financial statements include the accounts of GARS and its wholly-owned subsidiaries. The accounts of the subsidiaries are prepared using consistent accounting policies and as of the same reporting period as GARS. Under ASC Topic 946, the Company is generally precluded from consolidating any entity other than another investment company. Accordingly, the Company consolidates any investment company when it owns 100% of its equity units or 100% of the economic equity interest. ASC Topic 946 also provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.

As a result, GARS has consolidated the results of Garrison Funding 2016-2 Ltd. (“GF 2016-2”), Garrison Capital SBIC LP (“Garrison SBIC”), GLC Trust 2013-2 (“GLC Trust 2013-2”), Garrison Capital PL Holdings LLC, GIG Rooster Holdings I LLC and a series of limited liability companies that GARS created primarily to provide specific tax treatment for the minority equity and other investments held in these limited liability companies.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the consolidated financial statements, including the estimated fair values of investments and the amount of income and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

As of March 31, 2018 and December 31, 2017, cash held in designated bank accounts with Deutsche Bank Trust Company Americas (the “Custodian”) was $11.4 million and $13.8 million, respectively. Cash held in designated bank accounts with other major financial institutions was $1.4 million and $1.1 million as of March 31, 2018 and December 31, 2017, respectively. At times, these balances may exceed federally insured limits and this potentially subjects the Company to a concentration of credit risk. The Company believes it is not exposed to any significant credit risk associated with the Custodian.

The Company defines cash equivalents as highly liquid financial instruments with original maturities of three months or less, including those held in overnight sweep bank deposit accounts. As of both March 31, 2018 and December 31, 2017, the Company held no cash equivalents.

Cash and Cash Equivalents, Restricted

Restricted cash as of March 31, 2018 and December 31, 2017 included cash of $7.8 million and $4.6 million, respectively, held by GF 2016-2 in designated bank accounts with the Custodian. GF 2016-2 is required to use a portion of these amounts to pay interest expense, reduce borrowings at the end of the investment period and to pay other amounts in accordance with the terms of the indenture governing the 2016-2 CLO, as defined in Note 4. Funds held by GF 2016-2 are not available for general use by the Company.

As of both March 31, 2018 and December 31, 2017, the Company held no restricted cash equivalents.

20

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Investment Transactions and Related Investment Income and Expense

The Company records its investment transactions on a trade date basis, which is the date when management has determined that all material legal terms have been contractually defined for the transactions. These transactions could possibly settle on a subsequent date depending on the transaction type. Any amounts related to purchase, sale and principal paydowns that have traded but not settled are reflected as either a due to counterparty or due from counterparty on our consolidated statement of financial condition. All related revenue and expenses attributable to these transactions are reflected on the consolidated statements of operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded using the specific identification method.

The Company accrues interest income if it expects that ultimately it will be able to collect such income. Generally, when a payment default occurs on a loan in the portfolio, or if management otherwise believes that the issuer of the loan will not be able to make contractual interest payments or principal payments, the Investment Adviser will place the loan on non-accrual status and the Company will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, the Company remains contractually entitled to this interest.

The Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that the interest will not be collected and the amount of uncollectible interest can be reasonably estimated. For consumer loans, any loan which is 120 days past due is considered defaulted and 100% of the principal is charged off with no expected recovery or sale of defaulted receivables. As of both March 31, 2018 and December 31, 2017, the Company had one investment that was on non-accrual status.

Any original issue discounts, as well as any other purchase discounts or premiums on debt investments, are accreted or amortized and included in interest income over the maturity periods of the investments. If a loan is placed on non-accrual status, the Company will cease recognizing amortization of original issue discount and other purchase discount until all principal and interest is current through payment or until a restructuring occurs, such that the income is deemed to be collectible.

Certain investments may have contractual PIK interest. PIK represents accrued interest that is added to the principal amount of the investment on the respective interest payment dates instead of being paid in cash and generally becomes due at maturity of the investment or upon the investment being called by the issuer.

Loan Origination, Facility, Commitment and Amendment Fees

The Company may receive loan origination, prepayment, facility, commitment, forbearance and amendment fees in addition to interest income during the life of the investment. The Company may receive origination fees upon the origination of an investment.

Origination fees received by the Company are initially deferred and reduced from the cost basis of the investment and subsequently accreted into interest income over the stated term of the loan. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded into income.

We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. Facility fees, sometimes referred to as asset management fees, are accrued as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by the Company and are accrued over the life of the loan.

21

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Amendment and forbearance fees are paid in connection with loan amendments and waivers and are recognized upon completion of the amendments or waivers, generally when such fees are receivable. Any such fees are recorded and classified as other income and included in investment income on the consolidated statements of operations. As these fees are paid and recognized in connection with specific loan amendments or forbearance, they are typically non-recurring in nature.

Interest Expense

Interest expense is recorded on an accrual basis and includes the amortization of deferred debt issuance costs and any original issue discounts.

Fair Value Measurements

The Company values its investments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC Topic 820’s definition of fair value focuses on exit price in the principal, or most advantageous, market and prioritizes the use of market-based inputs over entity-specific inputs within a measurement of fair value.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

• Level 1 — Unadjusted quoted prices in active markets for identical investments as of the reporting date.

• Level 2 — Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar instruments where multiple price quotes can be obtained, and other observable inputs, such as interest rates, yield curves, credit risks, and default rates.

• Level 3 — Pricing inputs are unobservable and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation including, in certain instances, the Investment Adviser’s own assumptions about how market participants would price the financial instrument.

Our investments include debt investments (both funded and unfunded, “Debt Investments”), preferred and minority common equity investments of diversified companies (“Equity”) and a portfolio of unsecured small balance consumer loans (“Financial Assets”). Due to the nature of the Company’s strategy, the Company’s portfolio is primarily comprised of relatively illiquid investments that are privately held. Inputs into the determination of fair value of the Company’s portfolio investments require significant management judgment or estimation. This means that the Company’s portfolio valuations are based on unobservable inputs and the Investment Adviser’s own assumptions about how market participants would price the asset or liability in question. Valuations of privately held investments are inherently uncertain and they may fluctuate over short periods of time and may be based on estimates. The determination of fair value by the Board may differ materially from the values that would have been used if a ready market for these investments existed.

Net assets could be materially affected if the determinations regarding the fair value of the investments were materially higher or lower than the values that are ultimately realized upon the disposal of such investments.

22

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Valuation Techniques

The following is a description of the different valuation techniques utilized by the Company.

Debt Investments

Bid quotations – Certain of the Company’s debt investments are publicly traded instruments for which quoted market prices are not readily available. The fair value of these investments may be determined based on bid quotations from unaffiliated market makers or independent third-party pricing services or the price activity of comparable instruments. The Company will generally supplement the bid quotations for these investments by also performing a comparable yield approach outlined below.

Comparable yield approach – This valuation technique determines the fair value of an investment by assessing the expected market yield of other debt investments with similar credit structures, leverage statistics, interest rates and time to maturity. The Company generally uses this approach for its debt investments that have not been deemed to be credit-impaired and where a market rate of recovery is expected.

Market comparable companies – This valuation technique determines the total enterprise value of a company by assessing the expected multiple that a market participant would apply to that company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), revenue or other collateral that secures the investment. These valuation multiples are typically determined based on reviewing market comparable transactions or other comparable publicly traded companies, if any. The resulting enterprise value will dictate whether or not the Company’s debt investment has adequate enterprise value coverage. In instances where the enterprise value is inadequate, the market comparable companies approach may be used to estimate a recovery value for our credit-impaired debt investments.

Equity Investments

Market comparable companies – This valuation technique determines the total enterprise value of a company by assessing the expected multiple that a market participant would apply to that company’s EBITDA, revenue or other collateral that secures the investment. These valuation multiples are typically determined based on reviewing market comparable transactions or other comparable publicly traded companies, if any. When an external event, such as a purchase transaction, public offering or subsequent sale of equity occurs, the pricing indicated by that external event is utilized to corroborate our valuation.

Discounted cash flows – This valuation technique determines the fair value of an investment by projecting the expected cash flows based on contractual terms calculating the present value of such cash flows as of the valuation date using a discount rate.

Financial Assets

Discounted cash flows – This valuation technique determines the fair value of an investment by projecting the expected cash flows based on contractual terms calculating the present value of such cash flows as of the valuation date using a discount rate.

23

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Valuation Process

The Board is responsible for determining the fair value of the Company’s assets in good faith using a documented valuation policy and consistently applied valuation process. The valuation process is a multi-step process conducted at the end of each fiscal quarter as described below:

• The Company’s valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Investment Adviser responsible for credit monitoring.

• At least once annually, the valuation for each portfolio investment that does not have a readily available quotation is reviewed by an independent valuation firm, subject to the de minimis exception described below.

• Preliminary valuation conclusions are then documented, compared to the range of prices provided by an independent valuation firm where applicable, and discussed with our senior management and the Investment Adviser.

• The Investment Adviser submits these preliminary valuations to the Valuation Committee of the Board.

• The Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith.

As noted above, the Board has retained several independent valuation firms to review the valuation of each portfolio investment that does not have a readily available market quotation at least once during each 12-month period. To the extent a security is reviewed in a particular quarter, it is reviewed and valued by only one service provider.

However, the Board does not, and does not intend to, have de minimis investments of less than 0.5% of the Company’s total assets (up to an aggregate of 10.0% of the Company’s total assets) independently reviewed.

Dividends and Distributions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

24

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

2. Significant Accounting Policies and Recent Updates  – (continued)

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period will be shortened for the premium to the earliest call date. This new guidance is effective for annual and interim periods beginning on or after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2017-08 in the first quarter of 2018 and it did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, (“ASU 2016-18”). ASU 2016-18 is intended to clarify how entities present restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. We adopted ASU 2016-18 in the fourth quarter of 2017 and applied the guidance retrospectively to our prior period consolidated statement of cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the accounting guidance for revenue recognition from contracts with customers. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASU 2014-09 in the first quarter of 2018, and applied the guidance retrospectively to our prior period consolidated financial statements. The application of this guidance did not have a material impact on our consolidated financial statements.

25

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments

As of March 31, 2018, we held investments in 62 portfolio companies with a fair value of $392.8 million, a weighted average yield on debt investments measured at current fair value of 9.9% and a weighted average contractual maturity of 38 months. Weighted average yield measured at current fair value is calculated based on the interest expected to be received using the current all-in interest rate, contractual maturity date and the current fair value of the investment as of the balance sheet date.

The composition of the Company’s portfolio by industry at fair value as of March 31, 2018 and December 31, 2017 was as follows:

	Fair Value of Investments
Industry ($ in thousands)	As of March 31, 2018				As of December 31, 2017
Internet Software and Services	$	53,205	13.5	%	$	53,510	13.5	%
Healthcare Equipment and Services		50,872	13.0			44,362	11.2
Household Products and Durables		40,989	10.4			41,018	10.4
Hotels, Restaurants and Leisure		22,217	5.7			16,407	4.2
Food Products		21,525	5.5			21,520	5.5
Leisure Products		21,018	5.4			21,661	5.5
Air Freight and Logistics		20,107	5.1			19,432	4.9
Commercial Services and Supplies		19,191	4.9			19,257	4.9
Building Products		18,823	4.8			10,229	2.6
Textiles, Apparel and Luxury Goods		17,609	4.5			7,208	1.8
Auto Components		16,938	4.3			17,179	4.4
Chemicals		13,923	3.5			17,957	4.5
Transportation Services		12,959	3.3			10,739	2.7
Construction and Engineering		9,025	2.3			9,128	2.3
Diversified Telecommunication Services		8,662	2.2			8,246	2.1
Technology Hardware, Storage and Peripherals		8,340	2.1			9,097	2.3
Pharmaceuticals		8,205	2.1			7,933	2.0
Aerospace and Defense		8,156	2.1			8,203	2.1
Media		7,416	1.9			8,569	2.2
Trading Companies and Distributors		4,418	1.1			4,359	1.1
Oil, Gas and Consumable Fuels		4,112	1.0			9,840	2.5
Diversified Financial Services		3,159	0.8			3,745	0.9
Professional Services		1,908	0.5			1,889	0.5
Retailing		-	-			9,000	2.3
Machinery		-	-			8,200	2.1
Metals and Mining		-	-			6,042	1.5
	$	392,777	100.0	%	$	394,730	100.0	%

Refer to the consolidated schedules of investments for a detailed disaggregation of the Company’s investments.

26

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments – (continued)

The following tables summarize the valuation of the Company’s investments measured at fair value based on the fair value hierarchy, as detailed in Note 2, as of both March 31, 2018 and December 31, 2017:

	As of March 31, 2018
($ in thousands)	Level 1			Level 2		Level 3		Total
Senior Secured Investments(1)	$	—		$	—	$	381,982	$	381,982
Preferred Equity Investments		—			—		640		640
Common Equity Investments		—			—		8,696		8,696
Financial Assets		—	��		—		1,459		1,459
	$	—		$	—	$	392,777	$	392,777

(1) Included in senior secured loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in payment priority to other senior secured lenders.

	As of December 31, 2017
($ in thousands)	Level 1		Level 2		Level 3		Total
Senior Secured Investments(1)(2)	$	—	$	—	$	387,480	$	387,480
Preferred Equity Investments		—		—		640		640
Common Equity Investments		—		—		4,584		4,584
Financial Assets		—		—		2,026		2,026
	$	—	$	—	$	394,730	$	394,730

(1) Includes unfunded commitments with a negative fair value of $0.1 million.

(2) Included in senior secured loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in payment priority to other senior secured lenders.

The net change in unrealized loss attributable to the Company’s Level 3 assets for the three months ended March 31, 2018 and March 31, 2017 included in the net change in unrealized loss on investments in the Company’s consolidated statements of operations was $2.3 million and $8.4 million, respectively.

27

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments – (continued)

The following table is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value for the three months ended March 31, 2018:

	Three Months Ended March 31, 2018
	Senior Secured			Preferred Equity		Common Equity		Financial
($ in thousands)	Investments			Investments		Investments		Assets			Total
Fair value, beginning of period	$	387,480		$	640	$	4,584	$	2,026		$	394,730
Total net realized and unrealized (loss)/gain on investments(1)		(2,881	)		—		—		(8	)		(2,889	)
Total net accretion of discounts on investments		339			—		—		—			339
Purchases/issuances(2)		32,637			—		4,112		—			36,749
Sales		(1,395	)		—		—		—			(1,395	)
Paydowns(2)		(34,198	)		—		—		(559	)		(34,757	)
Fair value, end of period	$	381,982		$	640	$	8,696	$	1,459		$	392,777

(1) Net change in unrealized loss on investments attributable to our Level 3 assets still held at March 31, 2018 totaled $2.8 million, consisting of the following: Senior Secured Investments of $2.9 million, offset by unrealized gains on Financial Assets of $0.1 million.

(2) Includes non-cash restructurings of portfolio investments of $4.1 million. There were no transfers of investments between levels for the three months ended March 31, 2018.

The following table is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value for the three months ended March 31, 2017:

	Three Months Ended March 31, 2017
	Senior Secured			Preferred Equity			Common Equity		Financial
($ in thousands)	Investments			Investments			Investments		Assets			Total
Fair value, beginning of period	$	363,960		$	2,086		$	3,902	$	6,756		$	376,704
Total net realized and unrealized (loss)/gain on investments(1)		(7,662	)		(558	)		315		(270	)		(8,175	)
Total net accretion of discounts on investments		377			—			—		—			377
Purchases/issuances(2)		28,599			—			—		—			28,599
Sales		—			—			—		—			—
Paydowns(2)		(37,030	)		—			—		(1,727	)		(38,757	)
Fair value, end of period	$	348,244		$	1,528		$	4,217	$	4,759		$	358,748

(1) Net change in unrealized loss on investments attributable to our Level 3 assets still held at March 31, 2017 totaled $8.2 million, consisting of the following: Senior Secured Investments of $7.8 million, Preferred Equity Investments of $0.6 million and Financial Assets of $0.1 million, offset by unrealized gains on Common Equity Investments of $0.3 million.

(2) There were no non-cash restructuring of portfolio investments or transfers of investments between levels for the three months ended March 31, 2017.

28

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments – (continued)

The following table is a quantitative disclosure about significant unobservable inputs (Level 3) that were used in determining fair value at March 31, 2018:

		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value at		Valuation	Unobservable	Range						Weighted
($ in thousands)		March 31, 2018		Technique	Input	Low			High			Average
Senior Secured Investments	$		381,982	Comparable yield approach	Market rate(1)		5.9	%		23.7	%		9.7	%
				Market comparable companies	EBITDA multiple(4)		2.0	x		13.8	x		6.9	x
Equity Investments(2)			9,336	Market comparable companies	EBITDA multiple		5.5	x		6.5	x		5.6	x
					Origination fees multiple		4.0	x		4.0	x		4.0	x
				Discounted cash flows	Discount rate		10.0	%		10.0	%		10.0	%
Financial Assets(3)			1,459	Discounted cash flows	Interest rate		9.8	%		31.0	%		16.1	%
					Conditional prepayment rate		0.0	%		16.7	%		15.6	%
					Cumulative default rate		0.0	%		18.9	%		13.8	%
					Discount rate		7.0	%		7.0	%		7.0	%
Total	$		392,777

(1) Market rate is calculated based on the fair value of the investments and interest expected to be received using the current rate of interest at the balance sheet date to maturity, excluding the effects of future scheduled principal amortizations.

(2) Includes preferred and common equity.

(3) Financial Assets are valued by the level of risk associated with the underlying loan measured by the estimated loss rate. The estimated loss rate is based on the historical performance of loans with similar characteristics, the borrower’s credit score obtained from an official credit reporting agency at origination, debt-to-income ratios at origination, information from the borrower’s credit report at origination, as well as the borrower’s self-reported income range, occupation and employment status at origination. Financial Asset risk ratings are assigned on a scale from A through F, with A having the lowest level of risk and F having the highest level of risk. As of March 31, 2018, 10.9%, 38.6%, 39.4%, 9.1%, 2.0% and 0.0% of the total fair value of Financial Assets was comprised of A, B, C, D, E and F risk rated loans, respectively. See Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 for detail on the underlying loans.

(4) Excludes non-operating portfolio companies, which we define as those loans collateralized by proved developed producing (“PDP”) value, real estate or other hard assets. PDPs are proven revenues that can be produced with existing wells. As of March 31, 2018, non-operating portfolio companies with an aggregate of $2.9 million of par value and $2.9 million of fair value were excluded.

29

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments – (continued)

The following table is a quantitative disclosure about significant unobservable inputs (Level 3) that were used in determining fair value at December 31, 2017:

		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value at		Valuation	Unobservable	Range						Weighted
($ in thousands)		December 31, 2017		Technique	Input	Low			High			Average
Senior Secured Investments(1)	$		387,480	Comparable yield approach	Market rate(2)		6.1	%		18.1	%		9.8	%
				Market comparable companies	EBITDA multiple(5)		2.0	x		13.8	x		7.2	x
Equity Investments(3)			5,224	Market comparable companies	EBITDA multiple		6.0	x		6.5	x		6.1	x
					Origination fees multiple		3.6	x		3.6	x		3.6	x
Financial Assets(4)			2,026	Discounted cash flows	Interest rate		9.8	%		31.0	%		16.2	%
					Conditional prepayment rate		0.0	%		16.7	%		15.6	%
					Cumulative default rate		0.0	%		19.1	%		13.8	%
					Discount rate		7.0	%		7.0	%		7.0	%
Total	$		394,730

(1) Includes total unfunded commitments with a negative fair value of $0.1 million.

(2) Market rate is calculated based on the fair value of the investments and interest expected to be received using the current rate of interest at the balance sheet date to maturity, excluding the effects of future scheduled principal amortizations.

(3) Includes preferred and common equity.

(4) Financial Assets are valued by the level of risk associated with the underlying loan measured by the estimated loss rate. The estimated loss rate is based on the historical performance of loans with similar characteristics, the borrower’s credit score obtained from an official credit reporting agency at origination, debt-to-income ratios at origination, information from the borrower’s credit report at origination, as well as the borrower’s self-reported income range, occupation and employment status at origination. Financial Asset risk ratings are assigned on a scale from A through F, with A having the lowest level of risk and F having the highest level of risk. As of December 31, 2017, 11.9%, 38.1%, 38.6%, 9.4%, 2.0% and 0.0%, of the total fair value of Financial Assets was comprised of A, B, C, D, E and F risk rated loans, respectively. See Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for detail on the underlying loans.

(5) Excludes non-operating portfolio companies, which we define as those loans collateralized by PDP value, real estate or other hard assets. PDPs are proven revenues that can be produced with existing wells. As of December 31, 2017, non-operating portfolio companies with an aggregate of $23.5 million of par value and $22.1 million of fair value were excluded.

30

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

3. Investments – (continued)

Unobservable inputs used in the fair value measurement of the Company’s Debt and Equity Investments include bid quotations obtained from independent third party services (“consensus pricing”), multiples of market comparable companies, and relative comparable yields. Significant decreases (increases) in consensus pricing or market comparables could result in lower (higher) fair value measurements. Significant increases (decreases) in comparable yields could result in lower (higher) fair value measurements. Generally, a change in the assumption used for relative comparable yields is accompanied by a directionally opposite change in the assumptions used for pricing.

Unobservable inputs used in the fair value measurement of Financial Assets include interest rate, conditional prepayment rate, cumulative default rate and discount rate. Significant decreases (increases) in interest rates or conditional prepayment rates could result in lower (higher) fair value measurements. Significant increases (decreases) in cumulative default rates or discount rates could result in significantly lower (higher) fair value measurements.

The terms of the Debt Investments may provide for us to extend to a borrower additional credit or provide funding for any unfunded portion of such Debt Investments at the request of the borrower. This exposes us to potential liabilities that are not reflected on the consolidated statements of financial condition. As of March 31, 2018 and December 31, 2017, the Company had $5.9 million and $8.7 million of unfunded commitments.

4. Financing

As of March 31, 2018, the total carrying value of the Company’s aggregate debt outstanding was $234.5 million with a weighted average effective interest rate of 4.5%. The Company’s debt outstanding as of March 31, 2018 was comprised of notes issued by GF 2016-2 and Garrison SBIC borrowings.

The table below provides details of the Company’s outstanding debt including the weighted average interest rates and the weighted average effective interest rates, inclusive of the effects of deferred debt issuance costs as of March 31, 2018:

March 31, 2018 ($ in thousands)	Amortized Carrying Value		Outstanding Principal at Par		Interest Rate	Effective Interest Rate	Rating(1)	Stated Maturity
GF 2016-2 Secured Notes:
Class A-1R Notes	$	11,700	$	11,700	LIBOR + 2.20%(2)	4.17%	AAA(sf)	9/29/2027
Class A-1F Notes		24,728		25,000	3.41%	3.55%	AAA(sf)	9/29/2027
Class A-1T Notes		87,069		88,150	LIBOR + 2.20%	4.24%	AAA(sf)	9/29/2027
Class A-2 Notes		20,376		20,700	LIBOR + 3.15%	5.25%	AA(sf)	9/29/2027
Class B Notes		20,961		21,450	LIBOR + 4.00%	6.20%	A (sf)	9/29/2027
Class C Notes		11,428		11,700	LIBOR + 6.00%	8.24%	BBB(sf)	9/29/2027
Total /weighted average		176,262		178,700	4.57%	4.75%
Garrison SBIC Borrowings:
SBIC 2018-10 A		22,225		23,000	3.53%(3)	3.95%	N/A	3/1/2028
SBIC 2017-10 A		6,771		6,980	3.47%(3)	3.87%	N/A	3/1/2027
SBIC 2016-10 B		3,222		3,320	2.79%(3)	3.19%	N/A	9/1/2026
SBIC 2016-10 A		12,352		12,700	3.25%(3)	3.65%	N/A	3/1/2026
SBIC 2015-10 B		13,640		14,000	3.57%(3)	3.97%	N/A	9/1/2025
Total /weighted average		58,210		60,000	3.43%	3.84%
Total /weighted average	$	234,472	$	238,700	4.28%	4.52%

(1) Represents an S&P rating as of the closing of the 2016-2 CLO, as defined below.

(2) May bear interest at either the CP Rate (as defined in the governing indenture) or LIBOR.

(3) Represents the stated interest rate and annual charge of our debentures guaranteed by the U.S. Small Business Administration (the “SBA”).

31

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

4. Financing  – (continued)

The table below provides details of the Company’s outstanding debt including the weighted average interest rates and the weighted average effective interest rates, inclusive of the effects of deferred debt issuance costs as of December 31, 2017:

December 31, 2017 ($ in thousands)	Amortized Carrying Value		Outstanding Principal at Par		Interest Rate	Effective Interest Rate	Rating(1)	Stated Maturity
GF 2016-2 Secured Notes:
Class A-1R Notes	$	19,700	$	19,700	LIBOR + 2.20%(2)	3.73%	AAA(sf)	9/29/2027
Class A-1F Notes		24,722		25,000	3.41%	3.55%	AAA(sf)	9/29/2027
Class A-1T Notes		87,046		88,150	LIBOR + 2.20%	3.79%	AAA(sf)	9/29/2027
Class A-2 Notes		20,369		20,700	LIBOR + 3.15%	4.79%	AA(sf)	9/29/2027
Class B Notes		20,951		21,450	LIBOR + 4.00%	5.75%	A (sf)	9/29/2027
Class C Notes		11,423		11,700	LIBOR + 6.00%	7.78%	BBB(sf)	9/29/2027
Total /weighted average		184,211		186,700	4.16%	4.34%
Garrison SBIC Borrowings:
SBIC 2017-10 A		6,766		6,980	3.47%(3)	3.87%	N/A	3/1/2027
SBIC 2016-10 B		3,220		3,320	2.79%(3)	3.19%	N/A	9/1/2026
SBIC 2016-10 A		12,343		12,700	3.25%(3)	3.65%	N/A	3/1/2026
SBIC 2015-10 B		13,629		14,000	3.57%(3)	3.97%	N/A	9/1/2025
SBIC Interim Financing		12,362		12,800	LIBOR + 0.65%(4)	2.74%	N/A	3/21/2018
Total /weighted average		48,320		49,800	3.10%	3.51%
Total /weighted average	$	232,531	$	236,500	3.93%	4.16%

(1) Represents an S&P rating as of the closing of the 2016-2 CLO.

(2) May bear interest at either the CP Rate (as defined in the governing indenture) or LIBOR.

(3) Represents the stated interest rate and annual charge of our SBA-guaranteed debentures.

(4) These interim financings bore an interest rate of three month LIBOR + 0.65%, which was comprised of a weighted average annual charge of 0.35% and a spread of 0.30%. These interim financings had a maturity date of March 21, 2018, upon which they were pooled into ten year SBA-guaranteed debentures.

In accordance with the 1940 Act, with certain limited exceptions, the Company is currently allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing (other than the SBA debentures of Garrison SBIC, as permitted by exemptive relief which has been granted by the Securities and Exchange Commission (the “SEC”)). As of March 31, 2018 and December 31, 2017, the Company’s asset coverage for borrowed amounts was 203.6% and 200.5%, respectively. 

On March 28, 2018, the Board approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act, to the Company. As a result, effective as of March 28, 2019, subject to compliance with certain disclosure requirements, the asset coverage requirements applicable to the Company under the 1940 Act will be reduced to 150%.

32

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

4. Financing  – (continued)

Garrison Funding 2016-2 Secured Notes

On September 29, 2016, GF 2016-2 completed a $300.0 million collateralized loan obligation (the “2016-2 CLO”), the proceeds of which were utilized, along with cash on hand, to refinance notes issued under a previous collateralized loan obligation. The notes offered in the 2016-2 CLO (the “2016-2 Notes”) were issued by GF 2016-2 through a private placement and were comprised of: (i) $25.00 million of AAA(sf) Class A-1R Senior Secured Revolving Floating Rate Notes (“Class A-1R Notes”); (ii) $88.15 million of AAA(sf) Class A-1T Senior Secured Floating Rate Notes (“Class A-1T Notes”); (iii) $25.00 million of AAA(sf) Class A-1F Senior Secured Fixed Rate Notes (“Class A-1F Notes”); (iv) $20.70 million of AA(sf) Class A-2 Senior Secured Floating Rate Notes (“Class A-2 Notes” and collectively with the Class A-1R Notes, the Class A-1T Notes and the Class A-2F Notes, the “Class A Notes”); (v) $21.45 million of A(sf) Class B Secured Deferrable Floating Rate Notes (“Class B Notes”); (vi) $11.70 million of BBB(sf) Class C Secured Deferrable Floating Rate Notes (“Class C Notes” and collectively, the Class A Notes, Class B Notes and Class C Notes are referred to as the “Secured Notes”); and (vii) $108.00 million of subordinated notes (“Subordinated Notes”), which do not have a stated interest rate, are not rated and were retained by GARS. The 2016-2 Notes are scheduled to mature on September 29, 2027.

Subject to the 200% asset coverage limitations, currently applicable to the Company under the 1940 Act, as of March 31, 2018 and December 31, 2017, the Company had $6.5 million and $1.0 million, respectively, of available leverage capacity in the Class A-1R Notes under the 2016-2 CLO. The fair value of the 2016-2 Notes approximated their carrying values on the consolidated statements of financial condition as of March 31, 2018 and December 31, 2017.

The indenture governing the 2016-2 Notes provides that, to the extent cash is available from cash collections, the holders of the 2016-2 Notes are to receive quarterly interest payments on the 20th day or, if not a business day, the next succeeding business day of February, May, August and November of each year until the stated maturity.

Under the documents governing the 2016-2 CLO, there are two coverage tests applicable to the Secured Notes. The first test compares the amount of interest received on the collateral loans held by GF 2016-2 to the amount of interest payable on the Secured Notes under the 2016-2 CLO in respect of the amounts drawn and certain expenses. To meet this first test, at any time, the aggregate amount of interest received on the collateral loans must equal, after the payment of certain fees and expenses, at least 135.0% of the aggregate amount of interest payable on the Class A Notes, 125.0% of the interest payable on the Class A Notes and Class B Notes, taken together, and 115% of the interest payable on the Class A Notes, Class B Notes and Class C Notes, taken together. 

The second test compares the aggregate principal amount of the collateral loans, as calculated in accordance with the indenture, to the aggregate outstanding principal amount of the Secured Notes in respect of the amounts drawn. To meet this second test at any time, the aggregate principal amount of the collateral loans must equal at least 173.4% of the aggregate outstanding principal amount of the Class A Notes, 156.1% of the aggregate principal amount of the Class A Notes and Class B Notes, taken together, and 148.1% of the aggregate outstanding principal amount of the Class A Notes, Class B Notes and Class C Notes, taken together.

If the coverage tests are not satisfied with respect to a quarterly payment date, GF 2016-2 will be required to apply available amounts to the repayment of interest on and principal of the 2016-2 Notes to the extent necessary to satisfy the applicable coverage tests and, as a result, there may be reduced funds available for GF 2016-2 to make additional investments or to make distributions on the Subordinated Notes held by the Company. Additionally, compliance is measured on each day collateral loans are purchased, originated or sold and in connection with monthly reporting to the note holders.

33

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

4. Financing  – (continued)

Furthermore, if under the second coverage test the aggregate principal amount of the collateral loans equals 125.0% or less of the aggregate outstanding principal amount on the Class A-1T Notes and Class A-1R Notes, taken together, and remains so for ten business days, an event of default will be deemed to have occurred. As of March 31, 2018 and December 31, 2017, the trustee for the 2016-2 CLO has asserted that all of the coverage tests were met.

Garrison SBIC Borrowings

On May 29, 2014, Garrison SBIC, which has an investment objective substantially similar to GARS, was formed in accordance with small business investment company (“SBIC”) regulations. Garrison SBIC received a license from the SBA on May 26, 2015. The SBIC license allows Garrison SBIC to obtain SBA-guaranteed debentures in an amount equal to twice its equity capitalization up to $150.0 million of leverage, subject to the issuance of a capital commitment by the SBA and other customary procedures. On June 16, 2015, the SBA issued Garrison SBIC a commitment to provide $35.0 million of leverage and on October 24, 2016 issued a second commitment to provide an additional $35.0 million of leverage.

The SBA issues SBA-guaranteed debentures bi-annually on pooling dates in March and September of each year. These debentures are non-recourse, interest-only debentures with a 10 year stated maturity, but may be prepaid at any time without penalty. The interest rate of the debentures is fixed at the time of issuance and is based on a coupon rate over the ten year treasury rate at the time of issuance. Interest on the debentures is payable on a semi-annual basis. The SBA issues interim financings to SBICs on non-pooling dates that carry a lower interest rate than the debentures and mature on the next pooling date.

The SBA, as a creditor, will have a superior claim to Garrison SBIC’s assets over GARS’ stockholders if Garrison SBIC were to be liquidated, or if the SBA exercises its remedies under the SBA-guaranteed debentures issued by Garrison SBIC upon an event of default.

As of March 31, 2018, Garrison SBIC had regulatory capital of $36.1 million and total SBIC borrowings outstanding of $60.0 million. The fair value of the SBIC borrowings approximated the carrying value on the consolidated statements of financial condition as of March 31, 2018 and December 31, 2017. As of March 31, 2018, the Company had $10.0 million of available SBIC leverage capacity.

34

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

4. Financing  – (continued)

GLC Trust 2013-2 Notes

On July 18, 2014, the Company completed a $39.2 million term debt securitization and the notes offered thereby (the “GLC Trust 2013-2 Notes”) collateralized by the GLC Trust 2013-2 consumer loan portfolio. GLC Trust 2013-2 Notes consisted of $36.9 million of Class A Notes (“GLC Trust 2013-2 Class A Notes”) and $2.3 million of Class B Notes (“GLC Trust 2013-2 Class B Notes”). The GLC Trust 2013-2 Class A Notes bore interest at a rate of 3.00%. The GLC Trust 2013-2 Class A Notes and GLC Trust 2013-2 Class B Notes were fully paid down as of December 31, 2017.

Deferred Debt Issuance Costs and Other Fees

In connection with the issuance of our various debt instruments, the Company incurred aggregate fees in the amount of $6.2 million which consisted of facility fees, rating agency fees, legal fees and other costs. Costs incurred in connection with the issuance of the Company’s debt instruments are included as a reduction to the carrying amount of the related liability on the consolidated statements of financial condition and will be amortized over the stated maturity of the respective loans, with $4.5 million and $4.4 million of deferred debt issuance costs and discounts on notes payable remaining as of March 31, 2018 and December 31, 2017, respectively.

In the ordinary course of operations, the Company incurs fees and costs as part of the execution and refinancing of our various debt instruments. These costs typically represent facility fees, rating agency fees and other legal costs incurred in connection to our 2016-2 CLO and consist of a 1.00% fee on commitments received, as well as a 2.00% leverage fee, a 0.375% underwriting fee and a 0.05% administrative fee on our SBA-guaranteed debentures. Deferred debt issuance costs are included on the consolidated statements of financial condition as a reduction to the carrying amount of the related liability with the exception of those costs associated with our revolving credit facilities, which are included within other assets on our consolidated statement of financial condition. The deferred debt issuance costs will be amortized over the stated maturity of the debt liability to which they relate. As of March 31, 2018, $4.5 million of deferred debt issuance costs and discounts on notes payable remained on our consolidated statement of financial condition and was comprised of $2.6 million of costs related to the 2016-2 CLO and $1.9 million of costs related to our SBA-guaranteed debentures. As of December 31, 2017, $4.4 million of deferred debt issuance costs and discounts on notes payable remained on our consolidated statement of financial condition and was comprised of $2.7 million of costs related to the 2016-2 CLO and $1.7 million of costs related to our SBA-guaranteed debentures.

35

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements

Investment Advisory Agreement

The Investment Adviser is responsible for sourcing potential investments, conducting research and diligence on prospective investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis subject to the supervision of the Board. The Investment Adviser was organized in November 2010 and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Investment Adviser is an affiliate of Garrison Investment Group LP (the “Investment Manager”), which is also the investment manager of various stockholders of the Company.

GARS entered into an investment advisory agreement (the “Investment Advisory Agreement”) with the Investment Adviser, most recently amended and restated on May 3, 2017, which entitles the Investment Adviser to a management fee and an incentive fee, both of which are described further below.

On May 3, 2017, the Company amended and restated the Investment Advisory Agreement with the Investment Adviser following approval of the agreement by the Company’s stockholders which (i) reduced the management fee from an annual rate of 1.75% to an annual rate of 1.50% of the Company’s gross assets, excluding cash and cash equivalents but including assets purchased with borrowed funds, payable quarterly in arrears and (ii) reduced the hurdle rate for the income component of the incentive fee from 2.00% per quarter (8.00% annualized) to 1.75% per quarter (7.00% annualized).

Advisory Fee Waivers

From October 1, 2016 through May 2, 2017, the Investment Adviser, in consultation with the Board, irrevocably waived any fees payable to the Investment Adviser under the third amended and restated investment advisory agreement, dated August 5, 2016, with respect to a calendar quarter in excess of the sum of (i) 0.375% per quarter (1.50% annualized) of the gross assets of the Company, excluding cash and cash equivalents but including assets purchased with borrowed funds, calculated based on the average carrying value of the gross assets of the Company at the end of the two most recently completed calendar quarters, (ii) 20% of pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter, in excess of a “hurdle rate” of 1.75% per quarter (7.00% annualized) and (iii) in the case of the final calendar quarter of each year, the capital gains incentive fee.

36

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements – (continued)

Management Fee

Under the Investment Advisory Agreement, effective May 3, 2017, the Investment Adviser is entitled to a management fee for its services calculated at an annual rate of 1.50% of gross assets, excluding cash and cash equivalents, and cash and cash equivalents, restricted, but including assets purchased with borrowed funds. For purposes of the Investment Advisory Agreement, cash equivalents means U.S. government securities and commercial paper maturing within 270 days of purchase. Prior to May 3, 2017, the management fee was calculated at an annual rate of 1.75% of gross assets, excluding cash and cash equivalents, and cash equivalents, restricted, but including assets purchased with borrowed funds.

The following table details our management fee expenses for the three months ended March 31, 2018 and March 31, 2017:

	Three Months Ended March 31,
Management Fees ($ in thousands)	2018		2017
Management fee	$	1,492	$	1,611
Management fee waived		—		(230	)
Total management fees, net of waived fees	$	1,492	$	1,381

Management fees in the amount of $1.5 million and $0.1 million were payable as of March 31, 2018 and December 31, 2017, respectively, and are included in management fee payable on the consolidated statements of financial condition.

Incentive Fee Overview

Under the Investment Advisory Agreement, the Investment Adviser is entitled to an incentive fee consisting of two components and a cap and deferral mechanism. The two components are independent of each other, and may result in one component being payable even if the other is not.

Effective May 3, 2017, the first component, which is income-based and payable quarterly in arrears, equals 20.00% of the amount, if any, that the Company’s pre-incentive fee net investment income exceeds a 1.75% quarterly (7.00% annualized) hurdle rate (the “Hurdle Rate”), subject to a “catch-up” provision measured at the end of each calendar quarter.

The operation of the first component of the incentive fee for each quarter is as follows:

• no incentive fee will be payable to the Investment Adviser in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the Hurdle Rate of 1.75%;

• 100% of the Company’s 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 Rate but is less than 2.1875% in any calendar quarter (8.75% annualized) is payable to the Investment Adviser. We refer to this portion of the Company’s pre-incentive fee net investment income (which exceeds the Hurdle Rate but is less than 2.1875%) as the “catch-up.” The effect of the “catch-up” provision is that, if such pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter, the Investment Adviser will receive 20% of such pre-incentive fee net investment income as if the Hurdle Rate did not apply; and

• 20% of the amount of such pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Investment Adviser (once the Hurdle Rate is reached and the catch-up is achieved).

37

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements – (continued)

Prior to May 3, 2017, the first component of the incentive fee equaled 20.00% of the amount, if any, that the Company’s pre-incentive fee net investment income exceeded a 2.00% quarterly (8.00% annualized) hurdle rate, subject to a “catch-up” provision measured at the end of each calendar quarter.

The portion of such incentive fee that is attributable to deferred interest (such as PIK interest or original issue discount) will be paid to the Investment Adviser, together with any other interest accrued on the loan from the date of deferral to the date of payment, only if and to the extent the Company actually receives such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such amounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. For the avoidance of doubt, no incentive fee will be paid to the Investment Adviser on amounts accrued and not paid in respect of deferred interest.

The second component, which is capital gains-based, 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 equals 20% of the Company’s cumulative aggregate realized capital gains through the end of such year, computed net of the Company’s aggregate cumulative realized capital losses and aggregate cumulative unrealized capital loss through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees and subject to the Incentive Fee Cap and Deferral Mechanism described below. The capital-gains component of the incentive fee excludes any portion of realized gains/(losses) that are associated with the reversal of any portion of unrealized gain/(loss) attributable to periods prior to April 1, 2013. The capital gains component of the incentive fee is not subject to any minimum return to stockholders.

In addition, under U.S. GAAP, we are required to accrue a capital gains incentive fee based upon the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital gain and loss on investments held at the end of each period. If such amount is positive at the end of a period, then the Company will record a capital gains incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. There were no accrued capital gains incentive fees as of March 31, 2018 and December 31, 2017.

The Investment Advisory Agreement does not permit unrealized capital gains for purposes of calculating the amount payable to the Investment Adviser. Amounts due related to unrealized capital gains, if any, will not be paid to the Investment Adviser until realized under the terms of the Investment Advisory Agreement (as described above).

Incentive Fee Cap and Deferral Mechanism

We have structured the calculation of the incentive fees to include a fee limitation (the “Incentive Fee Cap and Deferral Mechanism”) such that no incentive fee will be paid to our Investment Adviser for any fiscal quarter if, after such payment, the cumulative incentive fees paid to our Investment Adviser for the period that includes such fiscal quarter and the 11 full preceding fiscal quarters (the “Incentive Fee Look-back Period”) would exceed 20.00% of our Cumulative Pre-Incentive Fee Net Return during the applicable Incentive Fee Look-back Period (the “Incentive Fee Cap”). The “Cumulative Pre-Incentive Fee Net Return” is defined as the sum of (1) pre-incentive fee net investment income, (2) cumulative realized capital gains/(losses), and (3) cumulative unrealized capital gains/(losses) for the Incentive Fee Look-back Period. Prior to April 1, 2016, the Incentive Fee Look-back Period consisted of fewer than 12 full fiscal quarters.

38

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements – (continued)

The following table provides a breakdown of our incentive fees for the three months ended March 31, 2018 and March 31, 2017:

	Three Months Ended March 31,
Incentive Fees ($ in thousands)	2018			2017
Income-based incentive fees	$	983		$	200
Capital gains-based incentive fees		—			—
Incentive fees subject to cap & deferral mechanism(1)		(983	)		(200	)
Total incentive fees	$	—		$	—

(1) As of March 31, 2018, we had cumulative net realized and unrealized capital losses in excess of our Pre-Incentive Fee Net Investment Income, resulting in zero Cumulative Pre-Incentive Fee Net Return during the Incentive Fee Look-back Period. As a result, as of March 31, 2018, no aggregate incentive fees were payable to the Investment Adviser during the Incentive Fee Look-back Period. As of March 31, 2018, an aggregate of $2.9 million had been paid to the Investment Adviser during the Incentive Fee Look-back Period.

Due to the fact that there is no clawback of amounts previously paid to the Investment Adviser in accordance with the Investment Advisory Agreement, the Company has not recorded a receivable for the $2.9 million difference between amounts paid under the Investment Advisory Agreement in prior quarters and the Incentive Fee Cap based on the Company’s Cumulative Pre-Incentive Fee Net Return as of March 31, 2018.

The $2.9 million difference may be used to reduce future amounts earned by the Investment Adviser. However, as noted above, no incentive fee will be paid to the Investment Adviser for any fiscal quarter if, after such payment, the cumulative incentive fees paid to our Investment Adviser for the Incentive Fee Look-back Period would exceed 20% of our Cumulative Pre-Incentive Fee Net Return during the applicable Incentive Fee Look-back Period. To the extent unrealized capital losses incurred as of March 31, 2018 are reversed within the applicable Incentive Fee Look-back Period, the corresponding increase in our Cumulative Pre-Incentive Fee Net Return may result in the Investment Adviser earning and being paid up to $9.9 million of income-based incentive fees which are currently subject to the Incentive Fee Cap.

Realized and unrealized capital gains and losses and pre-incentive net investment income earned during the three months ended March 31, 2018 will cease to impact the Incentive Fee Cap and Deferral after March 31, 2021.

The Investment Adviser earned aggregate incentive fees of $1.0 million and $0.2 million for the three months ended March 31, 2018 and March 31, 2017, respectively. However, none of the incentive fees earned were payable on the consolidated statements of financial condition as of March 31, 2018 and December 31, 2017 due to the Incentive Fee Cap.

39

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements – (continued)

Administration Agreement

GARS entered into an administrative agreement, which was effective as of October 9, 2012 (the “Administration Agreement”), with GARS Administrator. Under the Administration Agreement, the GARS Administrator provides the Company with office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities and such other services as the GARS Administrator, subject to review by the Board, from time to time determines to be necessary or useful to perform its obligations under the Administration Agreement. The GARS Administrator is responsible for the financial and other records that the Company is required to maintain and prepares reports to stockholders, and reports and other materials filed with the SEC. The GARS Administrator provides on the Company’s behalf significant managerial assistance to those portfolio companies to which the Company is required to provide such assistance. No managerial assistance was provided to any portfolio companies during the three months ended March 31, 2018 and March 31, 2017.

In addition, the GARS Administrator assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns, and the printing and dissemination of reports to stockholders of the Company, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. The Company reimburses the GARS Administrator for the costs and expenses incurred by the GARS Administrator in performing its obligations and providing personnel and facilities as described.

Administrator charges were $0.3 million and $0.2 million for the three months ended March 31, 2018 and March 31, 2017, respectively. No charges were waived by the GARS Administrator for the three months ended March 31, 2018 and March 31, 2017. As of March 31, 2018, $0.1 million of administration fees were payable to the GARS Administrator. No administration fees were payable to the GARS Administrator as of December 31, 2017.

Directors’ Fees

The Company’s independent directors each receive an annual fee of $75,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each in-person Board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each in-person committee meeting.

In addition, the chairman of the audit committee receives an annual fee of $10,000, the chairman of the valuation committee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $5,000 for their additional services in these capacities (all such fees and reimbursements collectively, “Directors’ Fees”). No compensation is paid to directors who are not independent of the Company and the Investment Adviser.

For the three months ended March 31, 2018 and March 31, 2017, independent directors earned Directors’ Fees of $0.1 million and $0.1 million, respectively. No Directors’ Fees were payable as of March 31, 2018 and December 31, 2017.

40

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

5. Related Party Transactions and Other Agreements – (continued)

Affiliated Stockholders

As of both March 31, 2018 and December 31, 2017, Garrison Capital Fairchild I Ltd., Garrison Capital Fairchild II Ltd. and Garrison Capital Adviser Holdings MM LLC owned an aggregate of 789,910, or 4.9%, of the total outstanding shares of GARS common stock. As of March 31, 2018 and December 31, 2017, the officers and directors of the Company owned an aggregate of approximately 238,250, or 1.5%, of the total outstanding shares of GARS common stock.

Other Agreements

Garrison Loan Agency Services LLC acts as the administrative and collateral agent for certain loans held by the Company. No fees were paid by the Company to Garrison Loan Agency Services LLC during the three months ended March 31, 2018 and March 31, 2017.

The Company may invest alongside other clients of the Investment Manager and its affiliates in certain circumstances where doing so is consistent with applicable law, SEC staff interpretations and the terms of our exemptive relief.

For certain expenses, the GARS Administrator facilitates payments by GARS to third parties through the Investment Adviser or other affiliate. Other than the amount of expenses paid to third parties and fees payable under the Investment Advisory Agreement, no additional charges or fees are assessed by the GARS Administrator, the Investment Adviser or other affiliates.

GARS entered into a custody agreement with Deutsche Bank Trust Company Americas to act as custodian for GARS. The Custodian is also the trustee of the 2016-2 CLO and the custodian for Garrison SBIC.

41

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

6. Financial Highlights

The following table represents financial highlights for the Company for the three months ended March 31, 2018 and March 31, 2017:

Per share data ($ in thousands, except share and per share amounts)	March 31, 2018			March 31, 2017
Net asset value per common share at beginning of period	$	11.69		$	12.42
Increase/(decrease) in net assets from operations:
Net investment income		0.31			0.26
Net realized (loss)/gain on investments		(0.04	)		0.01
Net unrealized loss on investments		(0.14	)		(0.51	)
Net increase/(decrease) in net assets resulting from operations		0.13			(0.24	)
Stockholder transactions
Distributions from net investment income		(0.28	)		(0.28	)
Total stockholder transactions		(0.28	)		(0.28	)
Net asset value per common share at end of period	$	11.54		$	11.90
Per share market value at beginning of period	$	8.11		$	9.35
Per share market value at end of period	$	8.12		$	9.78
Total book return(1)		1.11	%		(1.93	)%
Total market return(2)		3.55	%		7.60	%
Common shares outstanding at beginning of period		16,049,352			16,049,352
Common shares outstanding at end of period		16,049,352			16,049,352
Weighted average common shares outstanding		16,049,352			16,049,352
Net assets at beginning of period	$	187,658		$	199,408
Net assets at end of period	$	185,189		$	190,925
Average net assets(3)	$	188,231		$	197,286
Ratio of net expenses to average net assets(4)		11.28	%		9.74	%
Ratio of net investment income to average net assets(4)		10.44	%		8.49	%
Ratio of portfolio turnover to average investments at fair value(5)		9.06	%		7.66	%
Asset coverage ratio(6)		203.63	%		212.24	%
Average outstanding debt(7)	$	235,566		$	204,119
Average debt per common share	$	14.68		$	12.72

(1) Total book return equals the net increase of ending net asset value from operations plus the effect of repurchases of common stock over the net asset value per common share at the beginning of the period.

(2) Based upon the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.

(3) Calculated utilizing monthly net assets.

(4) During the three months ended March 31, 2018, $1.0 million of income-based incentive fees were capped as a result of the Incentive Fee Cap and Deferral Mechanism. Had these incentive fees been earned, the ratio of net investment income to average net assets and the ratio of net expenses to average net assets would have been 8.35% and 13.36%, respectively.

(5) Calculated based on monthly average investments at fair value.

(6) In accordance with the 1940 Act, with certain limited exceptions, the Company is currently allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. Based on the exemptive relief received from the SEC, Garrison SBIC’s SBA-guaranteed debentures are excluded from the Company’s asset coverage test calculation.

(7) Calculated based on monthly average debt outstanding.

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Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

7. Earnings per Share

The following table sets forth the computation of the net increase/(decrease) in net assets per share resulting from operations, pursuant to FASB ASC 260, Earnings per Share, for the three months ended March 31, 2018 and March 31, 2017:

	Three Months Ended March 31,
($ in thousands, except per share data)		2018		2017
Net increase/(decrease) in net assets resulting from operations	$	2,025	$	(3,988	)
Basic weighted average common shares outstanding		16,049,352		16,049,352
Basic earnings/(loss) per share	$	0.13	$	(0.24	)

8. Stockholders’ Equity

Distributions

The Company’s dividends and distributions are recorded on the ex-dividend date. The following table reflects the cash distributions declared on common stock for the three months ended March 31, 2018 and March 31, 2017:

Record Dates ($ in thousands except per share data)	Date Declared	Payment Date	Distribution Declared		Distribution Declared per Share
Three Months Ended March 31, 2018
March 23, 2018	February 28, 2018	March 29, 2018	$	4,494	$	0.28
			$	4,494	$	0.28

Record Dates ($ in thousands except per share data)	Date Declared	Payment Date	Distribution Declared		Distribution Declared per Share
Three Months Ended March 31, 2017
March 23, 2017	February 28, 2017	March 30, 2017	$	4,495	$	0.28
			$	4,495	$	0.28

Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with U.S. GAAP.

Dividend Reinvestment Plan

The Company adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, if the Board declares a cash dividend or other distribution, then our stockholders who have not ‘opted out’ of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, which may be newly issued shares or shares acquired by American Stock Transfer & Trust Company, LLC (“AST”), the transfer and dividend paying agent and registrar to GARS, through open-market purchases, rather than receiving the cash distribution. As of March 31, 2018 and December 31, 2017, no new shares were issued pursuant to the dividend reinvestment plan.

No action is required on the part of a registered stockholder to have its cash dividend or other distribution reinvested in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying AST in writing so that such notice is received by AST no later than the record date for distributions to stockholders.

Those stockholders whose shares are held by a broker or other financial intermediary may receive dividends and other distributions in cash by notifying their broker or other financial intermediary of their election.

43

Garrison Capital Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

March 31, 2018

9. Commitments and Contingencies

The Company had outstanding commitments to fund investments totaling $5.9 million and $8.7 million under various undrawn revolvers and other credit facilities as of March 31, 2018 and December 31, 2017, respectively.

In the ordinary course of business, the Company may be named as a defendant or a plaintiff in various lawsuits and other legal proceedings. Such proceedings include actions brought against the Company and others with respect to transactions to which the Company may have been a party. The outcomes of such lawsuits are uncertain and, based on these lawsuits, the values of the investments to which they relate could decrease. Management does not believe that as a result of litigation there would be any material impact on the consolidated financial condition of the Company. The Company has had no outstanding litigation proceedings brought against it since the commencement of operations on December 17, 2010.

In the normal course of business, the Company enters into certain contracts that provide a variety of indemnifications. The Company’s maximum exposure under these indemnifications is unknown. However, no liabilities have arisen under these indemnifications in the past and, while there can be no assurances in this regard, there is no expectation that any will occur in the future. Therefore, the Company does not consider it necessary to record a liability for any indemnifications under U.S. GAAP.

10. Transactions with Non-Control/Affiliate Investments 

As required by the 1940 Act, investments are classified by level of control. “Control Investments” are investments in those companies that the Company is deemed to control as defined in the 1940 Act. “Affiliate Investments” are investments in those companies that are affiliated companies, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.

There was no Non-Control/Affiliate activity for the three months ended March 31, 2018. The Non-Control/Affiliate Investments were fully realized as of December 31, 2017.

The following table shows the Non-Control/Affiliate activity for the three months ended March 31, 2017.

	Three Months Ended March 31, 2017
Portfolio Company ($ in thousands)	Fair value at December 31, 2016		Purchases (cost)		Redemptions (cost)		Sales (cost)		Transfer in/ (out) (cost)		Discount accretion		Net unrealized gains			Fair value at March 31, 2017		Net realized gain/(losses)		Interest and fee income		Dividend income
Non-control affiliate investments
Speed Commerce Operating Company LLC(1)	$	3,103	$	148	$	—	$	—	$	—	$	—	$	(3,251	)	$	—	$	—	$	148	$	—
Speed Commerce Investment Partners LLC		—		—		—		—		—		—		—			—		—		—		—
Total non-control affiliate investments	$	3,103	$	148	$	—	$	—	$	—	$	—	$	(3,251	)	$	—	$	—	$	148	$	—

(1) Comprised of two investments, including the Closing Date Term Loan and Delayed Draw Term Loan. 

11. Subsequent Events

There have been no events since March 31, 2018 that require recognition or disclosure in the consolidated financial statements.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. References to the “Company,” "we," "us," "our,” “GARS” and "Garrison Capital" refer to Garrison Capital Inc. and its consolidated subsidiaries.

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. 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;

• changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;

• our business prospects and the prospects of our current and prospective portfolio companies;

• the impact of investments that we expect to make;

• the impact of increased competition;

• our contractual arrangements and relationships with third parties;

• the dependence of our future success on the general economy, including general economic trends, and its impact on the industries in which we invest;

• the ability of our portfolio companies to achieve their objectives;

• the relative and absolute performance of Garrison Capital Advisers LLC, or our Investment Adviser, including in identifying suitable investments for us;

• our expected financings and investments;

• the adequacy of our cash resources and working capital;

• our ability to make distributions to our stockholders;

• the effects of applicable legislation and regulations and changes thereto;

• the timing of cash flows, if any, from the operations of our prospective portfolio companies; and

• the impact of future acquisitions and divestitures.

We use words such as “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “will,” “should,” “could,” “can,” “would,” “believe,” “estimate,” “anticipate,” “predict,” “potential” and similar words to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

We have based the forward-looking statements included in this Quarterly Report on Form 10-Q on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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You should understand that, under Section 27A(b)(2)(B) of the Securities Act of 1933, as amended, and Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with this Quarterly Report on Form 10-Q or any periodic reports we file under the Exchange Act.

Overview

We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and intend to qualify annually for such treatment. Our shares are currently listed on The NASDAQ Global Select Market under the symbol “GARS”.

Our investment objective is to generate current income and capital appreciation through direct loans and debt investments in U.S. based middle-market companies. Our loans and debt investments are primarily first lien senior secured loans (including "unitranche" loans, which are loans that combine the characteristics of both senior and subordinated debt, generally in a first lien position). We also may, to a lesser extent, invest in subordinated and mezzanine debt, unsecured consumer loans and equity investments. Our goal is to generate attractive risk-adjusted returns by assembling a broad portfolio of investments.

Our investment activities are managed by our Investment Adviser. The seven member investment committee of our Investment Adviser is comprised of Joseph Tansey, Brian Chase, Mitch Drucker, Susan George, Robert Chimenti, Joshua Brandt and Allison Adornato. Our Investment Adviser is responsible for sourcing potential investments, conducting research and diligence on prospective investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. Under an investment advisory agreement with the Investment Adviser, or the Investment Advisory Agreement, we pay a management fee and an incentive fee to our Investment Adviser for its services. Garrison Capital Administrator LLC, or the Administrator, provides certain administrative services and facilities necessary for us to operate, including office facilities and equipment and clerical, bookkeeping and record-keeping services, pursuant to an administration agreement, or the Administration Agreement. The Administrator oversees our financial reporting and prepares our reports to stockholders and reports required to be filed with the SEC.

The Administrator also manages the determination and publication of our net asset value, the preparation and filing of our tax returns and generally monitors the payment of our expenses and the performance of administrative and professional services rendered to us by others. The Administrator may retain third parties to assist in providing administrative services to us. To the extent that the Administrator outsources any of its functions, we pay the fees associated with such functions on a direct basis without any profit to the Administrator.

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Revenues

In general, we generate revenue in the form of interest earned on the debt investments that we hold and capital gains and distributions, if any, on the equity interests or warrants held in portfolio companies. Our debt investments, whether in the form of senior secured, unitranche or mezzanine loans, typically have a term of up to six years and may bear interest at a fixed or floating rate. Interest is generally payable monthly or quarterly, and in some cases, loans may have a payment-in-kind (“PIK”) feature. The principal amount of the debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of loan origination, prepayment, facility, commitment, forbearance and amendment fees. We also may receive structuring or diligence fees, consulting fees and possibly fees for providing managerial assistance. Origination fees received by us are initially deferred and reduced from the cost basis of the investment and subsequently accreted into interest income over the remaining stated term of the loan.

Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded into income. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. Facility fees, sometimes referred to as asset management fees, are accrued as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and are accrued over the life of the loan.

Amendment and forbearance fees are paid in connection with loan amendments and waivers and are recognized upon completion of the amendments or waivers, generally when such fees are receivable. Any such fees are recorded and classified as other income and included in investment income on the consolidated statements of operations. As these fees are paid and recognized in connection with specific loan amendments or forbearance, they are typically non-recurring in nature.

Expenses

Our primary operating expenses include the payment of (1) the interest expense on our outstanding debt; (2) the management and incentive fees to the Investment Adviser under the Investment Advisory Agreement, if applicable; (3) the allocable portion of overhead to the Administrator under the Administration Agreement; and (4) our other operating costs, as detailed below. We bear all other costs and expenses of our operations and transactions, including:

• our organization;

• calculating our net asset value and net asset value per share (including the cost and expenses of any independent valuation firms);

• fees and expenses, including travel expenses, incurred by the Investment Adviser or payable to third parties in performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

• offerings of our common stock and other securities;

• distributions on our shares;

• transfer agent and custody fees and expenses;

• amounts payable to third parties relating to, or associated with, evaluating, making and disposing of investments;

• brokerage fees and commissions;

• registration fees;

• listing fees;

• taxes;

• independent director fees and expenses;

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• costs associated with our reporting and compliance obligations under the 1940 Act and applicable U.S. federal and state securities laws;

• the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

• costs of holding stockholder meetings;

• our fidelity bond;

• directors and officers/errors and omissions liability insurance and any other insurance premiums;

• litigation, indemnification and other non-recurring or extraordinary expenses;

• direct costs and expenses of administration and operation, including audit and legal costs;

• fees and expenses associated with marketing efforts;

• dues, fees and charges of any trade association of which we are a member; and

• all other expenses reasonably incurred by us or the Administrator in connection with administering our business, including rent and our allocable portion of the costs and expenses of our chief compliance officer, chief financial officer and their respective staffs.

Recent Developments

On May 1, 2018 our board of directors, or the Board, declared a distribution in the amount of $4.5 million, or $0.28 a share, which will be paid on June 22, 2018 to stockholders of record as of June 8, 2018.

Consolidated Results of Operations

The results of operations described below may not be indicative of the results we report in future periods. Net income can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized gains and losses. As a result, quarterly comparisons of net income may not be meaningful.

Consolidated operating results for the three months ended March 31, 2018 and March 31, 2017 are as follows:

	Three Months Ended						Three Months
($ in thousands, except per share data)	March 31, 2018			March 31, 2017			Variance
Total investment income	$	10,221		$	8,994		$	1,227
Total expenses		5,307			4,807			500
Net investment income		4,914			4,187			727
Net realized (loss)/gain on investments		(577	)		204			(781	)
Net change in unrealized loss on investments		(2,312	)		(8,379	)		6,067
Net increase/(decrease) in net assets resulting from operations		2,025			(3,988	)		6,013
Net investment income per common share		0.31			0.26			0.05
Net realized/unrealized loss on investments per share		(0.18	)		(0.50	)		0.32
Basic earnings/(loss) per share		0.13			(0.24	)		0.37
Dividends and distributions declared per common share		0.28			0.28			—
Net asset value per share		11.54			11.90			(0.36	)

Net Investment Income

Net investment income for the three months ended March 31, 2018 and March 31, 2017 was $4.9 million and $4.2 million, respectively. As described below under “Investment Income” and “Expenses”, net investment income increased by $0.7 million for the three months ended March 31, 2018 from the three months ended March 31, 2017.

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Investment Income

Investment income for the three months ended March 31, 2018 and March 31, 2017 was $10.2 million and $9.0 million, respectively. Investment income increased by $1.2 million for the three months ended March 31, 2018 from the three months ended March 31, 2017 due to an increase in interest income and other income in the amounts of $1.0 million and $0.2 million, respectively. The increase in interest income was largely driven by a larger average portfolio size during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The increase in other income was primarily driven by an increase in prepayment fees recognized during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.

Expenses

Total expenses for the three months ended March 31, 2018 and March 31, 2017 were $5.3 million and $4.8 million, respectively.

The following table summarizes our expenses for the three months ended March 31, 2018 and March 31, 2017:

	Three Months Ended				Three Months
($ in thousands)	March 31, 2018		March 31, 2017		Variance
Interest expense	$	2,554	$	2,110	$	444
Management fee (net of waivers)		1,492		1,381		111
Incentive fees		—		—		—
Professional fees		294		319		(25	)
Directors' fees		77		82		(5	)
Administrator expenses		298		224		74
Other expenses		592		691		(99	)
Total expenses	$	5,307	$	4,807	$	500

Interest expense increased $0.4 million for the three months ended March 31, 2018 from the three months ended March 31, 2017, primarily due to a higher total carrying value of the Company’s aggregate debt outstanding coupled with a higher weighted average effective interest rate on debt outstanding.

Management fees increased by $0.1 million for the three months ended March 31, 2018 from the three months ended March 31, 2017, primarily due to higher average gross assets during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.

Net Realized (Loss)/Gain and Unrealized (Loss)/Gain on Investments

There was a net realized loss on investments of $0.6 million and a net gain on investments of $0.2 million for the three months ended March 31, 2018 and March 31, 2017, respectively.

The net realized loss on investments for the three months ended March 31, 2018 was primarily driven by a $0.9 million loss in connection with the restructuring of our investment in Rooster Energy Ltd.. This was offset by $0.3 million of realized gains from repayments and sales of other portfolio investments.

The net realized gain on investments for the three months ended March 31, 2017 was primarily driven by $0.4 million of gains from the partial and full repayments of portfolio investments. This was offset by $0.2 million of realized losses from charge-offs in the GLC Trust 2013-2’s consumer loan portfolio.

For the three months ended March 31, 2018 and March 31, 2017, the net change in unrealized loss on investments was $2.3 million and $8.4 million, respectively.

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The net change in unrealized loss on investments for the three months ended March 31, 2018 of $ 2.3 million was driven primarily by a $4.0 million negative credit-related adjustment on Profusion Industries, LLC. This was offset by a $0.9 million reversal of an unrealized loss in connection with the restructuring of our investment in Rooster Energy Ltd. and $0.8 million of positive market-related fair value adjustments primarily on our syndicated loan investments.

The net change in unrealized loss for the three months ended March 31, 2017 was driven primarily by $9.0 million of negative credit related adjustments on Walnut Hill Physicians Hospital, Speed Commerce Operating Company, Forest Park Medical Center at San Antonio and Badlands Production Company investments in the amounts of $3.4 million, $3.3 million, $1.2 million and $1.1 million, respectively. This was offset by an aggregate $0.6 million of positive fair value adjustments across various portfolio investments.

Net Increase/(Decrease) in Net Assets Resulting from Operations

We had a net asset value per common share outstanding on March 31, 2018 and December 31, 2017 of $11.54 and $11.69, respectively.

Based on basic weighted average shares outstanding of 16,049,352, the net increase in net assets from operations per share for the three months ended March 31, 2018 was $0.13 per share. This increase was driven by net investment income of $0.31 per share offset by net realized and unrealized losses of $0.18 per share incurred during the three months ended March 31, 2018.

Based on basic weighted average shares outstanding of 16,049,352, the net decrease in net assets from operations per share for the three months ended March 31, 2017 was $0.24 per share. This decrease was driven by net investment income of $0.26 per share offset by net realized and unrealized losses of $0.50 per share incurred during the three months ended March 31, 2017.

Liquidity and Capital Resources

As a business development company, we distribute substantially all of our net income to our stockholders and will have an ongoing need to raise additional capital for investment purposes. We generate cash primarily from offerings of our equity securities and the issuance of debt securities including the notes, or the 2016-2 Notes, issued in connection with the $300.0 million collateralized loan obligation that we completed in September 2016, or the 2016-2 CLO, the Small Business Administration, or SBA, guaranteed debentures issued by Garrison Capital SBIC LP, or Garrison SBIC, our small business investment company, or SBIC, subsidiary and any repayments of portfolio investments. In addition, our cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less also provide liquidity.

As of March 31, 2018 and December 31, 2017, we had cash of $12.8 million and $14.9 million, respectively. Also, as of March 31, 2018 and December 31, 2017, we had restricted cash of $7.8 million and $4.6 million, respectively.

In addition to proceeds from public and private offerings of our debt and equity securities, we have identified nine portfolio companies with a total par value of $24.5 million and a fair value of $24.2 million which we view as transitory investments. Transitory investments are generally those investments that we view as an additional source of liquidity that we are able to sell in order to fund investments that fit our core investment strategy. These transitory investments are generally at the lower end of our target portfolio yield range.

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Our primary use of funds from operations includes investments in portfolio companies, cash distributions to holders of our common stock, payments of interest on our debt, and payments of fees and other operating expenses we incur. We believe that our existing cash and cash equivalents, available borrowings and our transitory portfolio as of March 31, 2018 will be sufficient to fund our anticipated funding requirements through at least March 31, 2019. In addition, we may, from time to time, amend or refinance our leverage facilities and borrowings, including the 2016-2 Notes, in order to, among other things, modify covenants or the interest rates payable and extend the reinvestment period or maturity date. In addition to capital not being available, it may not be available on favorable terms. To the extent we are not able to raise additional capital, or otherwise generate sufficient liquidity or are at or near target leverage ratios, we may receive smaller allocations, if any, on new investment opportunities under the Investment Adviser’s allocation policy.

On February 28, 2018 the Board approved a distribution in the amount of $4.5 million, or $0.28 a share, which was paid on March 29, 2018 to stockholders of record as of March 23, 2018.

During the three months ended March 31, 2018, cash and restricted cash increased by $1.1 million as a result of net cash provided by operating activities of $3.7 million, offset by net cash used in financing activities in the amount of $2.6 million.

During the three months ended March 31, 2018, cash provided by operating activities resulted mainly from repayments and sales of investments in the amount of $36.2 million and net realized and unrealized loss on investments in the amount of $2.9 million, offset by purchases of investments in the amount of $35.8 million. Net cash used in financing activities resulted from cash distributions in the amount of $4.5 million and repayment of the senior secured revolving notes of the 2016-2 CLO in the amount of $8.0 million, offset by proceeds from the issuance of SBA-guaranteed debentures by Garrison SBIC in the amount of $10.2 million.

During the three months ended March 31, 2017, cash and restricted cash increased by $11.3 million as a result of net cash provided by operating activities of $17.7 million, offset by net cash used in financing activities in the amount of $6.4 million.

During the three months ended March 31, 2017, cash provided by operating activities resulted mainly from repayments of investments in the amount of $38.8 million and net realized and unrealized loss on investments in the amount of $8.2 million, offset by purchases of investments in the amount of $28.3 million. Net cash used in financing activities resulted from cash distributions in the amount of $4.5 million and repayment of the GLC Trust 2013-2 Class A notes in the amount of $2.0 million.

As of March 31, 2018 and December 31, 2017, we had $5.9 million and $8.7 million, respectively, of unfunded commitments. These amounts may or may not be funded to the borrowing party now or in the future. The unfunded commitments relate to loans with various maturity dates, but the entire amount was eligible for funding to the borrowers as of March 31, 2018 and December 31, 2017, respectively, subject to the terms of each loan’s respective credit agreement.

Subject to leverage and borrowing base restrictions, as of March 31, 2018, we had approximately $6.5 million available for additional borrowings under our senior secured revolving notes of the 2016-2 CLO and $10.0 million of available SBIC leverage. As of December 31, 2017, we had approximately $1.0 million available for additional borrowings under our senior secured revolving notes of the 2016-2 CLO and $20.2 million of available SBIC leverage subject to leverage and borrowing base restrictions.

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Portfolio Composition and Select Portfolio Information

As of March 31, 2018, we held investments in 62 portfolio companies with a fair value of $392.8 million. As of March 31, 2018, our portfolio had an average investment size of approximately $5.7 million, a weighted average yield on debt investments measured at amortized cost and current fair value of 10.0% and 9.9%, respectively, and a weighted average contractual maturity of 38 months.

The following table shows select information of our portfolio for the periods from March 31, 2018 to March 31, 2017.

Portfolio characteristics ($ in millions, % based on fair value)*	March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Total fair value	$	392.8		$	394.7		$	359.1		$	359.9		$	358.7
Number of portfolio companies		62			62			61			62			62
Average investment size(1)	$	5.7		$	6.0		$	5.7		$	5.7		$	5.7
Weighted average yield measured at fair value(2)(3)		9.9	%		10.0	%		10.4	%		10.2	%		10.8	%
Weighted average price(1)		98.1			98.6			92.3			92.2			92.9
First lien senior secured		97.2	%		98.2	%		97.8	%		97.4	%		97.1	%
Equity, consumer loans and other		2.8	%		1.8	%		2.2	%		2.6	%		2.9	%
Core		93.7	%		94.5	%		94.4	%		91.8	%		93.5	%
Transitory		6.3	%		5.5	%		5.6	%		8.2	%		6.5	%
Originated(4)		43.8	%		45.1	%		48.6	%		47.6	%		52.6	%
Club(5)		23.6	%		24.3	%		20.0	%		21.0	%		18.8	%
Purchased		32.6	%		30.6	%		31.4	%		31.4	%		28.6	%
Floating(1)		99.4	%		99.3	%		99.1	%		99.0	%		98.9	%
Fixed(1)		0.6	%		0.7	%		0.9	%		1.0	%		1.1	%
Performing(1)		98.8	%		98.9	%		96.7	%		96.7	%		97.1	%
Non-accrual(1)		1.2	%		1.1	%		3.3	%		3.3	%		2.9	%
Weighted average debt/EBITDA(1)(3)(6)		3.8	x		3.7	x		3.8	x		3.8	x		3.7	x
Weighted average risk rating(1)		2.3			2.4			2.6			2.7			2.6

(1) Excludes consumer loans and equity investments.

(2) Weighted average yield measured at fair value are calculated based on the interest expected to be received using the current all-in interest rate, contractual maturity date and the current fair value of the investment as of the balance sheet date.

(3) Excludes investments with a risk rating of 4, unfunded revolvers, non-accrual investments and equity investments.

(4) Originated positions include investments where we have sourced and led the execution of the deal.

(5) Club positions include investments where we provide direct lending to a borrower with one or two other lenders but did not lead the deal.

(6) Excludes non-operating portfolio companies, which we define as those investments collateralized by real estate, proved developed producing value, or PDP, or other hard assets. PDPs are proven revenues that can be produced with existing wells. As of March 31, 2018, $2.9 million of par value and $2.9 million of fair value was excluded.

* Table excludes positions with a fair value of zero, except for number of portfolio companies.

Inflation

Inflation has not had a significant effect on our results of operations in any of the reporting periods presented in our financial statements. However, from time to time, inflation may impact the operating results of our portfolio companies.

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Off-Balance Sheet Arrangements

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of March 31, 2018 and December 31, 2017, we had $5.9 million and $8.7 million of outstanding commitments to fund such investments, respectively. As of March 31, 2018 and December 31, 2017, we had $20.6 million and $19.5 million, respectively, of cash and restricted cash.

Ongoing Monitoring

We view active portfolio monitoring as a vital part of the investment process. Our Investment Adviser monitors the financial trends of each portfolio company to determine if it is meeting its respective business plan and to assess the appropriate course of action for each company.

Our Investment Adviser uses several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

• assessment of success in adhering to portfolio company’s business plan and compliance with covenants;

• periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;

• comparisons to other portfolio companies in the industry, if any;

• attendance at and participation in board meetings; and

• review of monthly and quarterly financial statements and financial projections for portfolio companies.

Our Investment Adviser assigns an internal rating for each of our portfolio companies. The rating scale is a numeric scale of 1 to 4 based on the credit attributes and prospects of the portfolio company’s business. In general, we use the ratings as follows:

• a rating of 1 denotes a high quality investment with no loss of principal expected;

• a rating of 2 denotes a moderate to high quality investment with no loss of principal expected;

• a rating of 3 denotes a moderate quality investment with market rates of expected loss of principal and potential non-compliance with financial covenants; and

• a rating of 4 denotes a low quality investment with an expected loss of principal. In the case of risk rating 4 loans, our Investment Adviser will assign a recovery value to the loan.

The following table shows the distribution of our investments on the 1 to 4 investment risk scale at fair value, excluding our interest in GLC Trust 2013-2 and equity investments, as of March 31, 2018 and December 31, 2017:

	As of March 31, 2018					As of December 31, 2017
($ in thousands)	Investments at Fair Value		Percentage of Total Investments			Investments at Fair Value		Percentage of Total Investments
Risk Rating 1	$	50,241		13.2	%	$	33,643		8.7	%
Risk Rating 2		174,190		45.6			164,242		42.4
Risk Rating 3		152,916		40.0			185,484		47.8
Risk Rating 4		4,635		1.2			4,111		1.1
	$	381,982		100.0	%	$	387,480		100.0	%

The weighted average risk rating of the portfolio decreased to 2.3 as of March 31, 2018 from 2.4 as of December 31, 2017 as a result of ordinary course portfolio activity.

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Contractual Obligations

A summary of our significant contractual payment obligations as of March 31, 2018 is as follows:

	Payments Due by Period
($ in thousands)	Less Than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years		Total
2016-2 CLO	$	—	$	—	$	—	$	178,700	$	178,700
SBIC Borrowings		—		—		—		60,000		60,000
Total contractual obligations	$	—	$	—	$	—	$	238,700	$	238,700

We have certain contracts under which we have material future commitments. Under the Investment Advisory Agreement, the Investment Adviser provides us with investment advisory and management services. We have agreed to pay for these services (1) a management fee equal to a percentage of the average adjusted value of our gross assets and (2) an incentive fee based on our performance.

We entered into the Administration Agreement on October 9, 2012 with the Administrator. Under the Administration Agreement, the Administrator furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping services and provides us with other administrative services necessary to conduct our day-to-day operations.

If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

Both the Investment Advisory Agreement and the Administration Agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other.

Related Party Transactions

We have entered into a number of business relationships with affiliated or related parties, including the following:

• We are party to the Investment Advisory Agreement with Garrison Capital Advisers LLC, under which our Investment Adviser is responsible for sourcing potential investments, conducting research and diligence on prospective investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis.

• The Administrator provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our Administration Agreement.

• We have entered into the License Agreement with Garrison Investment Group pursuant to which Garrison Investment Group has agreed to grant us a non-exclusive, royalty-free license to use the name “Garrison.”

• Under the Staffing Agreement, Garrison Investment Group provides the Investment Adviser with the resources necessary to fulfill these obligations. The Staffing Agreement provides that Garrison Investment Group will make available to the Investment Advisers experienced investment professionals and access to the senior investment personnel of Garrison Investment Group for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. The Staffing Agreement also includes a commitment that the members of the Investment Advisers’ investment committee serve in such capacity. The Staffing Agreement remains in effect until terminated and may be terminated by either party without penalty upon 60 days’ written notice to the other party. Services under the Staffing Agreement are provided to the Investment Adviser on a direct cost reimbursement basis, and such fees are not our obligation.

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• In connection with the 2016-2 CLO, we retained the Investment Adviser to furnish collateral management sub-management services to us pursuant to a sub-collateral management agreement. The Investment Adviser does not receive a fee for providing such services.

• From October 1, 2016 to May 2, 2017, the Investment Adviser, in consultation with our board of directors agreed to irrevocably waive any fees payable to the Investment Adviser under the Investment Advisory Agreement with respect to a calendar quarter in excess of the sum of (i) 0.375% per quarter (1.50% annualized) of our gross assets, excluding cash and cash equivalents but including assets purchased with borrowed funds, calculated based on the average carrying value of our gross assets at the end of the two most recently completed calendar quarters, (ii) 20% of 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, in excess of a “hurdle rate” of 1.75% per quarter (7.00% annualized) and (iii) in the case of the final calendar quarter of each year, the capital gains incentive fee.

We have adopted a joint code of ethics that governs the conduct of our and our Investment Adviser’s officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporation Law.

Critical Accounting Policies

The preparation of our financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. We have identified the following as critical accounting policies.

Basis for Consolidation

The consolidated financial statements include the accounts of GARS and its wholly-owned subsidiaries. The accounts of the subsidiaries are prepared using consistent accounting policies and as of the same reporting period as GARS. Under ASC Topic 946, Financial Services – Investment Companies, or ASC Topic 946, the Company is generally precluded from consolidating any entity other than another investment company. Accordingly, the Company consolidates any investment company when it owns 100% of its equity units or 100% of the economic equity interest. ASC Topic 946 also provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.

As a result, GARS has consolidated the results of Garrison Funding 2016-2 Ltd., Garrison SBIC, GLC Trust 2013-2, Garrison Capital PL Holdings LLC, GIG Rooster Holdings I LLC and a series of limited liability companies that GARS created primarily to provide specific tax treatment for the minority equity and other investments held in these limited liability companies.

Fair Value Measurements

The Company values its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC Topic 820’s definition of fair value focuses on exit price in the principal, or most advantageous, market and prioritizes the use of market-based inputs over entity-specific inputs within a measurement of fair value.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

• Level 1 — Unadjusted quoted prices in active markets for identical investments as of the reporting date.

• Level 2 — Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar investments where multiple price quotes can be obtained, and other observable inputs, such as interest rates, yield curves, credit risks, and default rates.

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• Level 3 — Pricing inputs are unobservable and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation including, in certain instances, the Investment Adviser’s own assumptions about how market participants would price the financial instrument.

Our investments include debt investments (both funded and unfunded), preferred and minority common equity investments of diversified companies (“Equity”) and a portfolio of unsecured small balance consumer loans (“Financial Assets”). Due to the nature of the Company’s strategy, the Company’s portfolio is primarily comprised of relatively illiquid investments that are privately held. Inputs into the determination of fair value of the Company’s portfolio investments require significant management judgment or estimation. This means that the Company’s portfolio valuations are based on unobservable inputs and the Investment Adviser’s own assumptions about how market participants would price the asset or liability in question. Valuations of privately held investments are inherently uncertain and they may fluctuate over short periods of time and may be based on estimates. The determination of fair value by the Board may differ materially from the values that would have been used if a ready market for these investments existed.

Net assets could be materially affected if the determinations regarding the fair value of the investments were materially higher or lower than the values that are ultimately realized upon the disposal of such investments.

Valuation of Investments

The following is a description of the different valuation techniques utilized by the Company.

Debt Investments

Bid quotations – Certain of our debt investments are publicly traded instruments for which quoted market prices are not readily available. The fair value of these investments may be determined based on bid quotations from unaffiliated market makers or independent third-party pricing services or the price activity of comparable instruments. We will generally supplement the bid quotations for these investments by also performing a comparable yield approach outlined below.

Comparable yield approach – This valuation technique determines the fair value of an investment by assessing the expected market yield of other debt investments with similar credit structures, leverage statistics, interest rates and time to maturity. We generally use this approach for our debt investments that have not been deemed to be credit-impaired and where a market rate of recovery is expected.

Market comparable companies – This valuation technique determines the total enterprise value of a company by assessing the expected multiple that a market participant would apply to that company’s earnings before interest, taxes, depreciation and amortization, revenue or other collateral that secures the investment. These valuation multiples are typically determined based on reviewing market comparable transactions or other comparable publicly traded companies, if any. The resulting enterprise value will dictate whether or not our debt investment has adequate enterprise value coverage. In instances where the enterprise value is inadequate, the market comparable companies approach may be used to estimate a recovery value for our credit-impaired debt investments.

Equity Investments

Market comparable companies – This valuation technique determines the total enterprise value of a company by assessing the expected multiple that a market participant would apply to that company’s earnings before interest, taxes, depreciation and amortization, revenue, originations or other collateral that secures the investment. These valuation multiples are typically determined based on reviewing market comparable transactions or other comparable publicly traded companies, if any. When an external event, such as a purchase transaction, public offering or subsequent sale of equity occurs, the pricing indicated by that external event is utilized to corroborate our valuation. 

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Discounted cash flows – This valuation technique determines the fair value of an investment by projecting the expected cash flows based on contractual terms calculating the present value of such cash flows as of the valuation date using a discount rate.

Financial Assets

Discounted cash flows – This valuation technique determines the fair value of an investment by projecting the expected cash flows based on contractual terms calculating the present value of such cash flows as of the valuation date using a discount rate.

Valuation Process

The Board is responsible for determining the fair value of the Company’s assets in good faith using a documented valuation policy and consistently applied valuation process. The valuation process is a multi-step process conducted at the end of each fiscal quarter as described below:

• The Company’s valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Investment Adviser responsible for credit monitoring.

• At least once annually, the valuation for each portfolio investment that does not have a readily available quotation is reviewed by an independent valuation firm, subject to the de minimis exception as more fully described below.

• Preliminary valuation conclusions are then documented, compared to the range of prices provided by an independent valuation firm where applicable, and discussed with our senior management and the Investment Adviser.

• The Investment Adviser submits these preliminary valuations to the Valuation Committee of the Board.

• The Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith. 

As noted above, the Board has retained several independent valuation firms to review the valuation of each portfolio investment that does not have a readily available market quotation at least once during each 12-month period. To the extent a security is reviewed in a particular quarter, it is reviewed and valued by only one service provider. However, the Board does not intend to have de minimis investments of less than 0.5% of the Company’s total assets (up to an aggregate of 10.0% of the Company’s total assets) independently reviewed.

Investment Transactions and Related Investment Income and Expense

We record our investment transactions on a trade date basis, which is the date when management has determined that all material legal terms have been contractually defined for the transactions. These transactions could possibly settle on a subsequent date depending on the transaction type. All related revenue and expenses attributable to our investment transactions are reflected on the consolidated statements of operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded using the specific identification method.

We accrue interest income if we expect that ultimately we will be able to collect such income. Generally, when payment default occurs on a loan in the portfolio, or if management otherwise believes that the issuer of the loan will not be able to make contractual interest payments, the Investment Adviser will place the loan on non-accrual status and we will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest.

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We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that the interest will not be collected and the amount of uncollectible interest can be reasonably estimated. For consumer loans, any loan which is 120 days past due is considered defaulted and 100% of the principal is charged off with no expected recovery or sale of defaulted receivables. As of both March 31, 2018 and December 31, 2017, the Company had one investment that was on non-accrual status.

Any original issue discounts, as well as any other purchase discounts or premiums on debt investments, are accreted or amortized and included in interest income over the maturity periods of the investments. If a loan is placed on non-accrual status, we will cease recognizing amortization of original issue discount and purchase discount until all principal and interest is current through payment or until a restructuring occurs, such that the income is deemed to be collectible.

Certain investments may have contractual PIK interest. PIK represents accrued interest that is added to the principal amount of the investment on the respective interest payment dates instead of being paid in cash and generally becomes due at maturity of the investment or upon the investment being called by the issuer. 

Interest Expense

Interest expense is recorded on an accrual basis and is adjusted for amortization of deferred debt issuance costs and any original issue discount.

Loan Origination, Facility, Commitment and Amendment Fees

The Company may receive loan origination, prepayment, facility, commitment, forbearance and amendment fees in addition to interest income during the life of the investment. The Company may receive origination fees upon the origination of an investment.

Origination fees received by the Company are initially deferred and reduced from the cost basis of the investment and subsequently accreted into interest income over the remaining stated term of the loan. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded into income.

We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. Facility fees, sometimes referred to as asset management fees, are accrued as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and are accrued over the life of the loan.

Amendment and forbearance fees are paid in connection with loan amendments and waivers and are recognized upon completion of the amendments or waivers, generally when such fees are receivable. Any such fees are recorded and classified as other income and included in investment income on the consolidated statements of operations. As these fees are paid and recognized in connection with specific loan amendments or forbearance, they are typically non-recurring in nature.

Distributions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is determined by our Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the period covered by our financial statements, the majority of the loans in our portfolio had floating interest rates, and we expect that our loans in the future will also have floating interest rates. These loans usually have floating interest rates based on the London Interbank Offer Rate, or LIBOR, and typically have interest rate re-set provisions that adjust applicable LIBOR under such loans to current market rates on a regular basis. In addition, the 2016-2 CLO has a floating interest rate provision based on a cost of funds that approximates LIBOR and we expect that any other credit facilities into which we enter in the future may have floating interest rate provisions.

Assuming that the interim and unaudited consolidated statement of financial condition as of March 31, 2018 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.

	(Decrease)/increase			(Decrease)/increase			Net (decrease)/increase
Change in interest rates ($ in thousands)	in interest income			in interest expense			in investment income
Down 50 basis points	$	(1,859	)	$	(769	)	$	(1,090	)
Down 25 basis points		(931	)		(384	)		(547	)
Up 25 basis points		944			384			560
Up 50 basis points		1,888			769			1,119
Up 100 basis points		3,777			1,537			2,240
Up 200 basis points		7,398			3,074			4,324

Although management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including indebtedness under the 2016-2 CLO, Garrison SBIC borrowings or additional borrowings, that could affect our net increase in net assets resulting from operations, or net income. Accordingly, we cannot assure you that actual results would not differ materially from the statement above.

We may in the future hedge against currency and interest rate fluctuations by using standard hedging instruments such as futures, forward contracts, currency options and interest rate swaps, caps, collars and floors, including with respect to the obligations of the 2016-2 CLO, to the extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in currency exchange and 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. We and our Investment Adviser have not hedged any of the obligations of the 2016-2 CLO.

Item 4: Controls and Procedures

As of the end of the period covered by this report, 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 Exchange Act). Based on our evaluation, our management, including 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 our periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, are based upon certain assumptions about the likelihood of future events and can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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Part II — Other Information

Item 1: Legal Proceedings

We, the Investment Adviser, the Administrator and our wholly-owned subsidiaries are not currently subject to any material legal proceedings.

Item 1A: Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors set forth below as well as in “Part 1. Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 6, 2018, which could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

Regulations governing our operation as a business development company, including those related to the issuance of senior securities, will affect our ability to, and the way in which we, raise additional debt or equity capital.

We expect that we will require a substantial amount of additional capital in order to grow our business. We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the current provisions of the 1940 Act, we are permitted as a business development company to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, immediately after each issuance of senior securities (other than the SBA-guaranteed debentures of Garrison SBIC, as permitted by exemptive relief we have been granted by the SEC) equals at least 200% through March 27, 2019 and 150% thereafter. If the value of our assets declines, we may be unable to satisfy this requirement. If that happens, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous and, depending on the nature of our leverage, repay a portion of our indebtedness.

The Board may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a business development company, we are not generally able to issue and sell our common stock at a price below current net asset value per share. We may, however, issue or sell our common stock at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock at a price below the current net asset value of the common stock if the Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of the Board, closely approximates the market value of such securities (less any distributing commission or discount). We also may conduct rights offerings at prices per share less than the net asset value per share, subject to the requirements of the 1940 Act. If we raise additional funds by issuing additional common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and our stockholders may experience dilution.

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Our strategy involves a high degree of leverage. We intend to continue to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us. The risks of investment in a highly leverage fund include volatility and possible distribution restrictions.

Our strategy involves a high degree of leverage. The use of leverage, including through the issuance of senior securities, magnifies the potential for gain or loss on amounts invested. We have incurred leverage in the past and currently incur leverage through the 2016-2 CLO and the SBA-guaranteed debentures issued by Garrison SBIC and, from time to time, intend to incur additional leverage to the extent permitted under the 1940 Act. In the future, we may borrow from, and issue senior securities, to banks, insurance companies and other lenders. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. The risks of investing in a highly leveraged fund include volatility and possible distribution restrictions. Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such holders to seek recovery against our assets in the event of a default. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments into which we may enter. In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be required by its terms to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds to any other uses.

If the value of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our equity stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make distributions on our common stock or preferred stock. Our ability to service our debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management fee payable to our Investment Adviser.

Through March 27, 2019, we are not permitted to issue senior securities unless, immediately after each such issuance (other than SBA-guaranteed debentures issued by Garrison SBIC, as permitted by exemptive relief we have been granted by the SEC), we have an asset coverage, as defined in the 1940 Act, of at least 200%. If our asset coverage ratio declines below 200% before March 28, 2019 (other than SBA-guaranteed debentures issued by Garrison SBIC, as permitted by exemptive relief we have been granted by the SEC), we cannot incur additional debt and could be required to sell a portion of our investments to repay certain types of debt when it is disadvantageous to do so. This could have a material adverse effect on our operations, and we may not be able to make distributions to our stockholders.  As of March 31, 2018, our total outstanding indebtedness was $238.7 and our asset coverage, computed in accordance with the 1940 Act, was 203.6%.  

The Small Business Credit Availability Act, which was signed into law in March 2018, modifies the applicable section of the 1940 Act and decreases the asset coverage requirements applicable to business development companies from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested persons).  On March 28, 2018, the Board approved the application of these reduced asset coverage requirements to us.  As a result, effective on March 28, 2019, subject to compliance with certain disclosure requirements, the asset coverage requirements applicable to us will be reduced from 200% to 150%. As of such date, we will be able to incur additional leverage and, therefore, the risk of an investment in us may increase.

The amount of leverage that we employ will depend on our Investment Adviser’s and the Board’s assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage.

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In addition, the terms governing the 2016-2 CLO and any indebtedness that we incur in the future could impose financial and operating covenants that restrict our business activities, including limitations that may hinder our ability to finance additional loans and investments or make the distributions required to maintain our status as a RIC under the Code.

The following table illustrates the effect of leverage on returns from an investment in our common stock assuming that we employ leverage such that our asset coverage equals (1) our actual asset coverage as of March 31, 2018 and (2) 150% at various annual returns, net of expenses, as of March 31, 2018. The assumed return on our portfolio is required by regulation of the SEC to assist investors in understanding the effects of leverage and is not a prediction of, and does not represent, our projected or actual performance. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

	Assumed Return on Our Portfolio (Net of Expenses)
	-10%			-5%			0%			5%			10%
Corresponding return to common stockholder assuming actual asset coverage as of March 31, 2018(1)		-28.66	%		-17.25	%		-5.83	%		5.58	%		17.00	%
Corresponding return to common stockholder assuming 150% asset coverage(2)		-43.76	%		-27.06	%		-10.36	%		6.35	%		23.05	%

(1) Assumes $427.0 million in total assets, $178.7 million of debt outstanding under the 2016-2 CLO, $60.0 million of debt outstanding under Garrison SBIC, $185.2 million in net assets as of March 31, 2018 and an average cost of funds of 4.52%, which is the weighted average effective interest rate of the 2016-2 CLO and debentures issued by Garrison SBIC, for the three months ended March 31, 2018, and includes the effects of the amortization of deferred debt issuance costs.

(2) Assumes $618.7 million in total assets, $423.9 million of total debt outstanding, $185.2 million in net assets as of March 31, 2018 and an average cost of funds of 4.52%, which is the weighted average effective interest rate of the 2016-2 CLO and debentures issued by Garrison SBIC, for the three months ended March 31, 2018, and includes the effects of the amortization of deferred debt issuance costs.

Based on our outstanding indebtedness of $238.7 million as of March 31, 2018 and an average cost of funds of 4.52% as of that date, our investment portfolio must experience an annual return of at least 2.55% to cover annual interest payments on the 2016-2 Notes and the SBA-guaranteed debentures of Garrison SBIC.

Based on an outstanding indebtedness of $423.9 million on an assumed 150% asset coverage ratio and an average cost of funds of 4.52%, our investment portfolio must experience an annual return of at least 3.10% to cover annual interest payments on the total debt outstanding.

On March 29, 2018, we announced that on March 28, 2018 our Board approved the reduction in the asset coverage requirements applicable to us to 150%. We will determine how, and to what extent, to implement a lower asset coverage ratio in consultation with the Board after we complete our evaluation of the various alternatives.

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

None. 

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

Item 6: Exhibits

EXHIBIT INDEX

Number	Description
31.1*	Certifications by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certifications by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*	GLC Trust 2013-2 Consumer Loan Pool Schedule of Investments.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements 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.

	Garrison Capital Inc.
Dated: May 8, 2018	By	/s/ Joseph Tansey
	Joseph Tansey
	Chief Executive Officer
	(Principal Executive Officer)
Dated: May 8, 2018	By	/s/ Brian Chase
	Brian Chase
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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