Great Elm Capital (GECC) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section incorporates the company's unaudited financial statements for Q1 2025, detailed from page F-17 - The financial statements listed in the index to financial statements are incorporated by reference into this item[14] - The detailed financial statements and corresponding notes begin on page F-17 of the report[96] Management's Discussion and Analysis of Financial Condition and Results of Operations GECC, a BDC, reported increased Q1 2025 investment income and net investment income, alongside portfolio growth and affirmed liquidity Overview GECC operates as a BDC, investing in secured debt, specialty finance, and CLO securities, externally managed and structured as a RIC - GECC's investment strategy focuses on secured debt in middle-market companies, income-generating equity in specialty finance companies, and investments in collateralized loan obligation (CLO) securities[15] - On April 23, 2024, the company formed a joint venture, the CLO Formation JV, LLC, to invest in CLO equity and loan accumulation facilities[16] - The company is externally managed by Great Elm Capital Management, LLC (GECM) and has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes[18][19] Portfolio and Investment Activity GECC's investment portfolio grew to $341.9 million in Q1 2025, with $48.1 million in acquisitions and a 12.29% weighted average yield, concentrated in key industries Investment Activity (Q1 2025 vs. Prior Quarters) | Quarter ended | Acquisitions (in thousands) | Dispositions (in thousands) | Weighted Average Yield (End of Period) | | :--- | :--- | :--- | :--- | | March 31, 2024 | $64,584 | $(29,289) | 12.84% | | December 31, 2024 | $61,724 | $(71,123) | 12.37% | | March 31, 2025 | $48,097 | $(27,039) | 12.29% | Portfolio Reconciliation (Q1 2025) | (in thousands) | For the Three Months Ended March 31, 2025 | | :--- | :--- | | Beginning Investment Portfolio, at fair value | $324,262 | | Portfolio Investments acquired | $48,097 | | Portfolio Investments repaid or sold | $(27,039) | | Net change in unrealized (depreciation) | $(4,387) | | Net realized gain | $264 | | Ending Investment Portfolio, at fair value | $341,910 | - As of March 31, 2025, the top three industry concentrations by fair value were Structured Finance (15.29%), Specialty Finance (12.51%), and Technology (9.28%)[38] Results of Operations Total investment income rose to $12.5 million in Q1 2025, yielding $4.6 million net investment income despite increased expenses, with a net unrealized depreciation Investment Income Comparison (in thousands) | Income Source | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Interest income | $7,966 | $7,581 | | Dividend income | $3,612 | $771 | | Other income | $917 | $557 | | Total Investment Income | $12,495 | $8,909 | Expenses Comparison (in thousands) | Expense Category | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total advisory and management fees | $2,422 | $1,738 | | Interest expense | $4,251 | $2,807 | | Other expenses | $1,179 | $1,166 | | Total Expenses | $7,851 | $5,711 | - The increase in dividend income is primarily due to the investment in the CLO JV, which was formed in the current year[41] - Interest expense increased primarily due to the issuance of the 8.50% Notes due 2029 and 8.125% Notes due 2029 in 2024[46] Net Realized and Unrealized Gain/Loss (in thousands) | Category | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Realized Gain (Loss) | $264 | $2,356 | | Net change in unrealized appreciation/ (depreciation) | $(4,387) | $(6,007) | Liquidity and Capital Resources As of March 31, 2025, GECC maintained $1.3 million cash, $12 million drawn on its credit facility, $207.4 million total debt, and a 163.8% asset coverage ratio, affirming sufficient liquidity - As of March 31, 2025, the company had approximately $1.3 million of cash and cash equivalents and $3.5 million in unfunded commitments[53][54] Contractual Obligations as of March 31, 2025 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | GECCO Notes | $57,500 | - | $57,500 | - | - | | GECCZ Notes | $40,000 | - | - | $40,000 | - | | GECCI Notes | $56,500 | - | - | $56,500 | - | | GECCH Notes | $41,400 | - | - | $41,400 | - | | Revolving Credit Facility | $12,000 | - | $12,000 | - | - | | Total | $207,400 | - | $69,500 | $137,900 | - | - The company's asset coverage ratio was approximately 163.8% as of March 31, 2025, exceeding the 150% minimum requirement under the Investment Company Act[70] Distributions The company declared a $0.37 per share distribution for Q1 2025, an increase from prior quarters, and set the same rate for Q2 2025 Recent Quarterly Distributions Declared | Record Date | Payment Date | Distribution Per Share | | :--- | :--- | :--- | | Dec 16, 2024 | Dec 31, 2024 | $0.35 | | Mar 17, 2025 | Mar 31, 2025 | $0.37 | | Jun 16, 2025 | Jun 30, 2025 | $0.37 | - The board set the distribution for the quarter ending June 30, 2025, at a rate of $0.37 per share, to be paid in cash from distributable earnings[76] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure, with $186.1 million in variable-rate debt, sensitive to a 1% rate change impacting net investment income by $1.86 million - As of March 31, 2025, the company's debt portfolio consisted of approximately $186.1 million in variable-rate instruments and $64.6 million in fixed-rate instruments[78] Hypothetical Impact of Interest Rate Changes on Net Investment Income (in thousands) | Reference Rate Change | Increase (decrease) of Net Investment Income | | :--- | :--- | | +3.00% | $5,583 | | +2.00% | $3,722 | | +1.00% | $1,861 | | -1.00% | $(1,861) | | -2.00% | $(3,722) | | -3.00% | $(5,583) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal controls during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2025[83] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, internal controls[84] PART II. OTHER INFORMATION Legal Proceedings The company is a defendant in Intrepid Investments, LLC v. London Bay Capital, a lawsuit alleging fiduciary duty breaches, currently in pre-trial discovery - The company is a defendant in the lawsuit Intrepid Investments, LLC v. London Bay Capital, which is currently in the pre-trial discovery phase on surviving claims[209] Risk Factors No material changes to the company's risk factors were reported for the period, with a full discussion available in the Form 10-K for FY2024 - No material changes in risk factors were reported for the period covered by this report. The company refers to its Form 10-K for the year ended December 31, 2024 for a full discussion[87] Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended March 31, 2025 - During the quarter ended March 31, 2025, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement[88] Exhibits This section lists all exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data in inline XBRL format - The exhibits filed with this report include the CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and financial statements in inline XBRL format (Exhibit 101)[91] Financial Statements and Notes Statements of Assets and Liabilities (unaudited) As of March 31, 2025, GECC reported total assets of $350.8 million, net assets of $132.3 million, and NAV per share of $11.46 Key Balance Sheet Items (in thousands, except per share data) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total investments, at fair value | $341,910 | $332,710 | | Total assets | $350,830 | $342,028 | | Total liabilities | $218,535 | $205,915 | | Total net assets | $132,295 | $136,113 | | Net asset value per share | $11.46 | $11.79 | Statements of Operations (unaudited) For Q1 2025, total investment income was $12.5 million, yielding $4.6 million net investment income and a $0.5 million net increase in net assets from operations Key Operational Results (in thousands, except per share data) | Line Item | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Total investment income | $12,495 | $8,909 | | Total expenses | $7,851 | $5,711 | | Net investment income | $4,576 | $3,193 | | Net realized and unrealized gains (losses) | $(4,123) | $(3,651) | | Net increase (decrease) in net assets | $453 | $(458) | | Earnings per share (basic and diluted) | $0.04 | $(0.05) | Statements of Changes in Net Assets (unaudited) In Q1 2025, net assets decreased by $3.8 million to $132.3 million, primarily due to distributions, partially offset by operations Reconciliation of Net Assets for Q1 2025 (in thousands) | Description | Amount | | :--- | :--- | | Net assets at beginning of period (Jan 1, 2025) | $136,113 | | Net increase from operations | $453 | | Distributions to stockholders | $(4,271) | | Net assets at end of period (Mar 31, 2025) | $132,295 | Statements of Cash Flows (unaudited) Net cash used in operating activities was $5.9 million in Q1 2025, offset by $7.1 million from financing, resulting in a $1.3 million increase in cash - Net cash used for operating activities was $(5.9) million for the three months ended March 31, 2025, driven by purchases of investments of $47.8 million, offset by proceeds from sales and principal payments[102][55] - Net cash provided by financing activities was $7.1 million, consisting of $12.0 million in net borrowings on the revolving credit facility less $4.8 million in distributions paid to stockholders[102][56] Schedule of Investments (unaudited) As of March 31, 2025, the $341.9 million investment portfolio was primarily debt and equity, concentrated in key industries, with 93.7% in the US Portfolio Composition by Investment Type (as of March 31, 2025) | Investment Type | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | Debt | $242,921 | 183.63% | | Equity/Other | $98,989 | 74.82% | | Total | $341,910 | 258.45% | Top 5 Industry Concentrations (as of March 31, 2025) | Industry | Fair Value (in thousands) | Percentage of Fair Value | | :--- | :--- | :--- | | Structured Finance | $52,210 | 15.29% | | Specialty Finance | $42,778 | 12.51% | | Technology | $31,730 | 9.28% | | Consumer Products | $25,675 | 7.51% | | Transportation Equipment Manufacturing | $25,611 | 7.49% | - The portfolio is primarily concentrated in the United States, which accounts for 93.7% (or $320.5 million) of the portfolio's fair value[109] Notes to the Unaudited Financial Statements This section details accounting policies, GECM agreement, fair value measurements ($178.9 million Level 3), $207.4 million debt, and financial highlights including $11.46 NAV per share Note 3. Significant Agreements and Related Parties The company is externally managed by GECM, incurring a 1.50% base management fee and a 20% income incentive fee over a 7% hurdle, with $1.3 million in management fees and $1.2 million in income incentive fees for Q1 2025 - The base management fee is calculated at an annual rate of 1.50% of the company's average adjusted gross assets. For Q1 2025, this amounted to $1,272 thousand[155][156] - The Income Incentive Fee is 20% of pre-incentive fee net investment income over a 7.0% annualized hurdle rate. For Q1 2025, the company incurred $1,150 thousand in income incentive fees[158][163] - The Capital Gains Incentive Fee is 20% of cumulative realized capital gains since April 1, 2022, net of losses and unrealized depreciation. No fee was accrued for Q1 2025[162][163] Note 4. Fair Value Measurement The $341.9 million investment portfolio is categorized by fair value hierarchy, with $178.9 million in Level 3 assets and $56.0 million valued at NAV Fair Value Hierarchy of Investments (as of March 31, 2025, in thousands) | Level | Debt | Equity/Other | Total | | :--- | :--- | :--- | :--- | | Level 1 | $ - | $3,127 | $3,127 | | Level 2 | $103,897 | $ - | $103,897 | | Level 3 | $139,024 | $39,912 | $178,936 | | Total Categorized | $242,921 | $43,039 | $285,960 | | Investment measured at NAV | | | $55,950 | | Total Investments | | | $341,910 | - For the three months ended March 31, 2025, there was a net transfer of assets from Level 3 to Level 2 of $21.9 million, primarily due to increased pricing transparency for six investments[178] Note 5. Debt As of March 31, 2025, total debt outstanding was $207.4 million, including $12 million from a credit facility and $195.4 million in unsecured notes, with a 163.8% asset coverage ratio - The company has a $25 million senior secured revolving credit facility with City National Bank, maturing in May 2027. As of March 31, 2025, $12 million was outstanding[185] Unsecured Notes Outstanding (as of March 31, 2025, in thousands) | Note Series | Principal Outstanding | Maturity Date | | :--- | :--- | :--- | | GECCO 5.875% | $57,500 | June 30, 2026 | | GECCZ 8.75% | $40,000 | Sep 30, 2028 | | GECCI 8.50% | $56,500 | April 30, 2029 | | GECCH 8.125% | $41,400 | Dec 31, 2029 | | Total | $195,400 | | - The company's asset coverage ratio was approximately 163.8% as of March 31, 2025, compliant with the 150% minimum requirement[198] Note 9. Financial Highlights For Q1 2025, NAV per share decreased to $11.46, with $0.40 per share net investment income, a 0.34% NAV return, and a 20.88% annualized expense ratio Financial Highlights Per Share | Per Share Data | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net asset value, beginning of period | $11.79 | $12.99 | | Net investment income | $0.40 | $0.37 | | Net increase (decrease) from operations | $0.04 | $(0.05) | | Distributions declared | $(0.37) | $(0.35) | | Net asset value, end of period | $11.46 | $12.57 | Key Ratios and Supplemental Data | Ratio/Data | For the Three Months Ended March 31, 2025 | For the Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Total return based on net asset value | 0.34% | (0.53)% | | Total return based on market value | (3.91)% | 7.14% | | Ratio of total expenses to avg. net assets (annualized) | 20.88% | 18.51% | | Ratio of net investment income to avg. net assets (annualized) | 16.12% | 13.71% | | Portfolio turnover | 8% | 12% |