Great Elm Capital (GECC) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated financial statements and notes detail the company's financial position, performance, and investment portfolio Consolidated Statements of Assets and Liabilities (unaudited) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total investments | $240,490 | $283,348 | | Cash and cash equivalents | $22,837 | $4,606 | | Total assets | $273,609 | $291,039 | | Total liabilities | $222,764 | $204,150 | | Total net assets | $50,845 | $86,889 | | Net asset value per share | $5.05 | $8.63 | Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31 | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Total investment income | $6,429 | $6,313 | | Total expenses | $3,777 | $3,529 | | Net investment income | $2,652 | $2,784 | | Net realized gain (loss) | $(11,313) | $608 | | Net change in unrealized appreciation (depreciation) | $(24,877) | $4,676 | | Net increase (decrease) in net assets from operations | $(33,538) | $8,068 | | Net investment income per share | $0.26 | $0.26 | | Earnings per share | $(3.33) | $0.76 | Consolidated Statements of Changes in Net Assets (unaudited) for the Three Months Ended March 31 | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- |\n| Net assets at beginning of period | $86,889 | $110,116 | | Net increase (decrease) in net assets from operations | $(33,538) | $8,068 | | Distributions to stockholders | $(2,506) | $(2,637) | | Purchases of common stock | $- | $(1,593) | | Net assets at end of period | $50,845 | $113,954 | | Shares outstanding at end of period | 10,062,682 | 10,460,401 | Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31 | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $21,372 | $6,043 | | Net cash provided by (used for) financing activities | $(3,141) | $(6,803) | | Net increase (decrease) in cash | $18,231 | $(760) | | Cash, end of period | $22,837 | $3,407 | | Cash paid for interest | $2,044 | $1,313 | Investment Portfolio Composition (Fair Value) | Investment Type | March 31, 2020 (in thousands) | Percentage of Net Assets (March 31, 2020) | December 31, 2019 (in thousands) | Percentage of Net Assets (December 31, 2019) | | :--- | :--- | :--- | :--- | :--- | | Debt | $146,708 | 288.55% | $174,066 | 200.33% | | Equity/Other | $18,804 | 36.98% | $23,549 | 27.10% | | Short-Term Investments | $74,978 | 147.46% | $85,733 | 98.67% | | Total Investments | $240,490 | 472.99% | $283,348 | 326.10% | Top 5 Industry Classifications (Fair Value) as of March 31, 2020 | Industry | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | Wireless Telecommunications Services | $35,986 | 70.78% | | Internet Media | $18,978 | 37.33% | | Software Services | $15,824 | 31.11% | | Food & Staples | $13,133 | 25.83% | | Retail | $9,904 | 19.48% | Geographic Composition (Fair Value) as of March 31, 2020 | Geography | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | United States | $204,475 | 402.16% | | United Kingdom | $36,015 | 70.83% | | Total | $240,490 | 472.99% | Notes to the Unaudited Consolidated Financial Statements 1. ORGANIZATION - Great Elm Capital Corp. (GECC) is a Maryland corporation, externally managed, non-diversified closed-end management investment company, regulated as a Business Development Company (BDC)[138] - The company aims to generate current income and capital appreciation primarily through secured and senior unsecured debt investments in secondary markets[139] 2. SIGNIFICANT ACCOUNTING POLICIES - The financial statements are prepared in accordance with GAAP and reflect all necessary adjustments for interim periods[140] - Revenue recognition includes accrual of interest and dividend income (including PIK), amortization of upfront fees and OID, and recognition of other fees as earned[143] - Investments are valued at fair value based on Board-adopted policies, prioritizing observable market data (Level 1, 2) and using valuation techniques like market and income approaches for unobservable inputs (Level 3)[149][151][154] - The company has elected to be taxed as a Regulated Investment Company (RIC) and intends to distribute at least 90% of its investment company taxable income to avoid corporate-level taxes[157] - The company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2020-04 (Reference Rate Reform) with no material impact on financial statements[163][165] 3. SIGNIFICANT AGREEMENTS and RELATED PARTIES - The company has an Investment Management Agreement with Great Elm Capital Management, Inc. (GECM) for advisory services, incurring a base management fee and an incentive fee[167] Management Fees | Period | Amount (in thousands) | | :--- | :--- | | Three months ended March 31, 2020 | $698 | | Three months ended March 31, 2019 | $706 | Incentive Fees (Income Incentive Fee) | Period | Amount (in thousands) | | :--- | :--- | | Three months ended March 31, 2020 | $100 | | Three months ended March 31, 2019 | $696 | Note: As of March 31, 2020, $8,257 thousand of Income Incentive Fees remained payable, deferred due to total return requirement. - An Administration Agreement with GECM covers office facilities, equipment, clerical, bookkeeping, and record-keeping services, with reimbursement for allocable overhead and expenses[180] 4. FAIR VALUE MEASUREMENT - Fair value is determined using a hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable market inputs other than Level 1), and Level 3 (significant unobservable inputs)[185][189] Summary of Investment Assets by Fair Value Hierarchy (March 31, 2020) | Assets | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Debt | $- | $27,209 | $119,499 | $146,708 | | Equity/Other | $- | $- | $18,804 | $18,804 | | Short Term Investments | $74,978 | $- | $- | $74,978 | | Total investment assets | $74,978 | $27,209 | $138,303 | $240,490 | - During Q1 2020, one investment ($6,917k fair value) transferred from Level 3 to Level 2 due to increased pricing transparency, while three investments ($16,965k aggregate fair value) transferred from Level 2 to Level 3 due to decreased pricing transparency[194] 5. DEBT - The company has three series of unsecured notes outstanding: 6.50% Notes due 2022 (GECCL Notes), 6.75% Notes due 2025 (GECCM Notes), and 6.50% Notes due 2024 (GECCN Notes)[72][74](index=74&type=chunk