Great Elm Capital (GECC) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's financial performance, condition, and risk management practices for the reporting period Item 1. Financial Statements This section incorporates the company's unaudited financial statements by reference, with detailed statements provided at the end of the report - The financial statements listed in the index to financial statements are incorporated by reference into this item[13] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's investment income grew significantly year-over-year for the second quarter and first half of 2025, primarily driven by increased dividend income from new specialty finance investments, accompanied by a rise in expenses, notably interest expense from new debt issuances, with the investment portfolio expanding to $403.3 million and net assets increasing to $140.0 million, resulting in a NAV per share of $12.10 as of June 30, 2025, while maintaining sufficient liquidity to meet its obligations Overview Great Elm Capital Corp. operates as a Business Development Company focused on generating income and capital appreciation through debt and income-generating equity investments - Great Elm Capital Corp. (GECC) is a Business Development Company (BDC) focused on generating current income and capital appreciation through debt and income-generating equity investments, including specialty finance and CLO securities[14] - In April 2024, the company formed a joint venture, CLO Formation JV, LLC, to invest in CLO equity and warehouses[15] - The company has elected to be treated as a Regulated Investment Company (RIC), which requires distributing at least 90% of its investment company taxable income to stockholders annually to avoid corporate-level income taxes[18] Portfolio and Investment Activity The company's investment portfolio grew to $403.3 million by June 30, 2025, with significant concentrations in short-term investments, structured finance, and technology Investment Activity Summary (in thousands) | Period | Acquisitions | Dispositions | | :--- | :--- | :--- | | For the Year Ended Dec 31, 2024 | $345,684 | $(245,576) | | For the Six Months Ended Jun 30, 2025 | $84,686 | $(77,089) | Portfolio Reconciliation (in thousands) | Description | For the Six Months Ended Jun 30, 2025 | For the Year Ended Dec 31, 2024 | | :--- | :--- | :--- | | Beginning Investment Portfolio, at fair value | $324,262 | $230,612 | | Portfolio Investments acquired | $84,686 | $345,684 | | Portfolio Investments repaid or sold | $(77,089) | $(245,576) | | Net change in unrealized appreciation (depreciation) | $1,003 | $(10,771) | | Net realized gain (loss) | $723 | $1,876 | | Ending Investment Portfolio, at fair value | $335,053 | $324,262 | - As of June 30, 2025, the total investment portfolio at fair value was $403.3 million, an increase from $332.7 million at December 31, 2024, with the largest industry concentrations being Short-Term Investments (16.90%), Structured Finance (13.74%), and Technology (10.93%)[38] Results of Operations Total investment income significantly increased in Q2 and H1 2025, driven by higher dividend income, while total expenses also rose due to increased interest expense Investment Income Comparison (in thousands) | Income Type | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Interest income | $7,969 | $7,763 | $15,935 | $15,344 | | Dividend income | $6,236 | $1,570 | $9,848 | $2,341 | | Total Investment Income | $14,277 | $9,548 | $26,772 | $18,457 | - The significant increase in dividend income for Q2 and H1 2025 was primarily due to investments in Trouvaille Re Ltd. and the CLO JV, which was formed in 2024[41] Expense Comparison (in thousands) | Expense Type | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Management fees | $1,278 | $1,068 | $2,550 | $2,008 | | Incentive fees | $1,470 | $764 | $2,620 | $1,562 | | Interest expense | $4,318 | $3,473 | $8,569 | $6,280 | | Total Expenses | $8,305 | $6,490 | $16,156 | $12,201 | - Interest expense increased in 2025 due to the issuance of $56.5 million of 8.50% Notes and $36.0 million of 8.125% Notes in 2024, partially offset by the redemption of $45.6 million of 6.75% Notes[46] - For Q2 2025, net unrealized appreciation was $5.4 million, primarily driven by a $13.7 million increase in the fair value of the investment in CW Opportunity 2, LP, contrasting with a net unrealized depreciation of $3.9 million in Q2 2024[50] Liquidity and Capital Resources As of June 30, 2025, the company maintained sufficient liquidity with $1.0 million in cash and $3.4 million in money market funds, supported by a $25 million revolving credit facility and a 169.5% asset coverage ratio - As of June 30, 2025, the company had approximately $1.0 million in cash and cash equivalents and $3.4 million in money market funds, with the investment portfolio consisting of $221.2 million in debt instruments and $113.8 million in equity investments at fair value[54] Contractual Obligations as of June 30, 2025 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 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 | $6,000 | - | $6,000 | - | | Total | $201,400 | $57,500 | $6,000 | $137,900 | - As of June 30, 2025, the company had $6 million in borrowings outstanding under its $25 million senior secured revolving line of credit with City National Bank, which matures in May 2027[64] - The company's asset coverage ratio was approximately 169.5% as of June 30, 2025, above the minimum requirement of 150% under the Investment Company Act[73] Share Price Data and Distributions The company's common stock has generally traded at a discount to NAV, with the board setting the distribution for Q3 2025 at $0.37 per share NAV and Distribution Per Share Trend | Quarter | NAV per Share | Distributions Declared | | :--- | :--- | :--- | | Q1 2024 | $12.57 | $0.35 | | Q2 2024 | $12.06 | $0.35 | | Q3 2024 | $12.04 | $0.35 | | Q4 2024 | $11.79 | $0.35 | | Q1 2025 | $11.46 | $0.37 | | Q2 2025 | $12.10 | $0.37 | - During the last two fiscal years, the company's common stock has generally traded at a discount to NAV, with the discount ranging from 1.0% to 40.4%[74][75] - The company's board set the distribution for the quarter ending September 30, 2025, at a rate of $0.37 per share[79] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, with a sensitivity analysis indicating a $1.66 million change in net investment income for every 1% shift in reference rates - As of June 30, 2025, the company's debt portfolio consisted of $166.4 million in variable-rate instruments and $60.7 million in fixed-rate instruments[81] Interest Rate Sensitivity Analysis (in thousands) | Reference Rate Change | Increase (decrease) of Net Investment Income | | :--- | :--- | | +3.00% | $4,991 | | +2.00% | $3,327 | | +1.00% | $1,664 | | -1.00% | $(1,664) | | -2.00% | $(3,327) | | -3.00% | $(4,991) | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of June 30, 2025, the company's disclosure controls and procedures were effective[86] - No material changes to the internal control over financial reporting occurred during the quarter ended June 30, 2025[87] PART II. OTHER INFORMATION This section details legal proceedings, risk factors, other disclosures, and supporting exhibits Legal Proceedings The company may be involved in legal proceedings in the ordinary course of business, with details provided in Note 7 of the unaudited financial statements - The company is party to certain legal proceedings in the ordinary course of business, with a detailed description available in Note 7 of the financial statements[89] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes in risk factors were reported for the period covered by this report[90] Other Information During the quarter ended June 30, 2025, no director or officer of the company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter[91] Exhibits This section lists the exhibits filed with the quarterly report, including charter documents, bylaws, and certifications from the CEO and CFO - The report includes exhibits such as the Amended and Restated Charter, Bylaws, and CEO/CFO certifications[93] Financial Statements (unaudited) This section provides the company's unaudited financial statements, including assets, operations, investments, and detailed notes Statements of Assets and Liabilities As of June 30, 2025, total assets grew to $409.3 million from $342.0 million at year-end 2024, primarily due to an increase in total investments, with total liabilities also increasing to $269.3 million from $205.9 million, consequently, total net assets rose to $140.0 million, with a Net Asset Value (NAV) per share of $12.10, up from $11.79 at year-end Statements of Assets and Liabilities (in thousands, except per share data) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total investments | $403,259 | $332,710 | | Total assets | $409,326 | $342,028 | | Total liabilities | $269,294 | $205,915 | | Total net assets | $140,032 | $136,113 | | Net asset value per share | $12.10 | $11.79 | Statements of Operations For the six months ended June 30, 2025, the company generated total investment income of $26.8 million and net investment income of $10.5 million, resulting in a net increase in net assets from operations of $12.2 million, a significant improvement from the $1.8 million net decrease in the same period of 2024 Statements of Operations Summary (in thousands) | Line Item | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Total investment income | $26,772 | $18,457 | | Total expenses | $16,156 | $12,201 | | Net investment income | $10,480 | $6,251 | | Net realized and unrealized gains (losses) | $1,716 | $(8,035) | | Net increase (decrease) in net assets | $12,196 | $(1,784) | Schedule of Investments As of June 30, 2025, the company's investment portfolio had a fair value of $403.3 million, composed of $221.2 million in debt, $113.8 million in equity/other, and $68.2 million in short-term investments, with top concentrations in Structured Finance, Technology, and Specialty Finance Portfolio Composition by Investment Type (June 30, 2025) | Investment Type | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | Debt | $221,242 | 158.00% | | Equity/Other | $113,811 | 81.27% | | Short-Term Investments | $68,206 | 48.71% | | Total | $403,259 | 287.98% | Top 5 Industry Concentrations by Fair Value (June 30, 2025) | Industry | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | Structured Finance | $55,427 | 39.58% | | Technology | $44,092 | 31.49% | | Specialty Finance | $36,351 | 25.96% | | Consumer Products | $27,321 | 19.51% | | Chemicals | $26,940 | 19.24% | Notes to the Unaudited Financial Statements The notes provide detailed explanations of the company's accounting policies, related-party agreements, debt structure, fair value measurements, and capital activities, including fee structures, debt terms, Level 3 asset valuation, unfunded commitments, and financial highlights Note 3. Significant Agreements and Related Parties The company pays its external manager, GECM, a base management fee of 1.50% of average adjusted gross assets and a two-part incentive fee based on income and capital gains - The company pays its external manager, GECM, a base management fee of 1.50% of average adjusted gross assets and a two-part incentive fee based on income and capital gains[156][158][160] Advisory Fees Incurred (in thousands) | Fee Type | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Management Fees | $2,550 | $2,008 | | Income Incentive Fees | $2,620 | $1,562 | Note 4. Fair Value Measurement This note details the fair value hierarchy of the company's investments, categorizing them into Level 1, Level 2, Level 3, and those measured at NAV Fair Value Hierarchy of Investments (June 30, 2025) | Level | Fair Value (in thousands) | | :--- | :--- | | Level 1 | $71,192 | | Level 2 | $97,365 | | Level 3 | $162,257 | | Measured at NAV | $72,445 | | Total Investments | $403,259 | Note 5. Debt As of June 30, 2025, the company had $6 million outstanding on its $25 million revolving credit facility and $195.4 million in aggregate principal of unsecured notes, maintaining an asset coverage ratio of approximately 169.5% - As of June 30, 2025, the company had $6 million outstanding on its $25 million revolving credit facility and $195.4 million in aggregate principal of unsecured notes[184][199] Unsecured Notes Outstanding (June 30, 2025) | Series | Principal Amount (in millions) | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | GECCO | $57.5 | 5.875% | June 2026 | | GECCZ | $40.0 | 8.75% | September 2028 | | GECCI | $56.5 | 8.50% | April 2029 | | GECCH | $41.4 | 8.125% | December 2029 | - The company's asset coverage ratio was approximately 169.5% as of June 30, 2025, compliant with the 150% regulatory requirement[195] Note 7. Commitments and Contingencies As of June 30, 2025, the company had approximately $1.8 million in unfunded commitments and is a defendant in a lawsuit related to its investment in Speedwell Holdings - As of June 30, 2025, the company had approximately $1.8 million in unfunded commitments to provide financing to certain portfolio companies[205] - The company is a defendant in a lawsuit, Intrepid Investments, LLC v. London Bay Capital, related to its portfolio investment in Speedwell Holdings, with parties currently in pre-trial discovery[207][208] Note 9. Financial Highlights This note provides key per share data and total return metrics for the company's financial performance Per Share Data and Returns | Metric | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net asset value, beginning of period | $11.79 | $12.99 | | Net increase (decrease) from operations | $1.06 | $(0.20) | | Distributions declared | $(0.74) | $(0.70) | | Net asset value, end of period | $12.10 | $12.06 | | Total return based on net asset value | 9.18% | (1.79)% | Note 11. Subsequent Events Subsequent to the quarter end, the Board of Directors set the distribution for the quarter ending September 30, 2025, at a rate of $0.37 per share - Subsequent to the quarter end, the Board of Directors set the distribution for the quarter ending September 30, 2025, at a rate of $0.37 per share[220]