Great Elm Capital (GECC) - 2022 Q4 - Annual Report

Investment Portfolio - As of December 31, 2022, the portfolio includes significant investments in various industries, with companies representing over 5% of the fair market value[19] - Prestige Capital Finance has factored over $6 billion in transactions over its 30 years of operation, indicating strong market presence[22] - Lenders Funding has supplied several hundred million dollars in funding since its inception, showcasing its role in the asset-based lending market[21] - Great Elm Capital Management has expanded its investment allocation in specialty finance companies, aiming for attractive risk-adjusted returns[27] Management Fees - The base management fee for GECM is set at an annual rate of 1.50% of the average adjusted gross assets, payable quarterly[47] - The Income Incentive Fee is based on pre-incentive fee net investment income, which includes interest and dividend income, minus operating expenses[49] - The fixed hurdle rate for pre-incentive fee net investment income is 1.75% per quarter, equating to 7.00% annualized[51] - For the year ended December 31, 2022, the company incurred $3.2 million in base management fees and $0.6 million in income-based fees accrued during the period, excluding a waiver of $4.9 million in incentive fees earned in previous periods[62] Capital Gains Incentive Fee - The Capital Gains Incentive Fee is calculated at 20% of the positive difference between cumulative realized capital gains and cumulative realized capital losses, with no fees earned if the amount is negative[55] - The company reset the Capital Gains Incentive Fee to begin on April 1, 2022, eliminating $163.2 million of historical realized and unrealized losses from prior calculations[65] - Aggregate realized capital gains for the company are reported at $30.0 million, with no aggregate realized capital losses or unrealized capital depreciation, leading to a Capital Gains Incentive Fee of $6.0 million for the year[66] - There were no capital gains incentive fees earned by the company for the years ended December 31, 2020 and 2021, indicating a lack of realized gains during those periods[64][63] Investment Management Agreement - The Investment Management Agreement allows for termination by either party with 60 days' written notice, ensuring flexibility in management arrangements[70] - Conflicts of interest may arise if changes to the Investment Management Agreement are sought, requiring stockholder approval for material changes[71] - The Board approved the renewal of the Investment Management Agreement through September 26, 2023, considering various factors but did not identify any single factor as controlling[75] - GECM waived $4.9 million of accrued incentive fees due to poor performance under prior leadership, which was a consideration in the Board's decision[76] Financial Compliance and Requirements - The company is required to maintain a coverage ratio of total assets to total senior securities of at least 150%[80] - The company must derive at least 90% of its gross income from specified sources to qualify as a RIC under the Internal Revenue Code[92] - The company must diversify its holdings, ensuring that no more than 25% of total assets are invested in securities of any single issuer[92] - The company is permitted to issue multiple classes of indebtedness if asset coverage is at least 150% immediately after issuance[89] Taxation and Distributions - The company intends to distribute annually all or substantially all of its taxable income to avoid U.S. federal income tax on investment company taxable income and net capital gains[94] - To avoid a nondeductible 4% federal excise tax, the company must distribute at least 98% of its ordinary income and its investment company taxable income during each calendar year[96] - If the company fails to meet the Annual Distribution Requirement, all taxable income will be subject to tax at regular corporate rates, and distributions will be taxable to stockholders as ordinary dividends[98] - The company may choose to retain net capital gains for investment, which would subject it to U.S. federal income tax at regular corporate rates[95] Foreign Investments and Risks - If the company invests in foreign securities, it may be subject to withholding and other foreign taxes, which stockholders generally cannot claim as a U.S. foreign tax credit[107] - The company is required to recognize income from foreign corporations classified as controlled foreign corporations (CFCs) regardless of actual distributions received[109] - The company may face limitations on declaring and paying dividends due to loan covenants, which could jeopardize its qualification as a RIC[112] Administrative and Operational Aspects - The company has policies in place for calculating reimbursement of administrative expenses related to investment advisory and management services[68] - The Administration Agreement with GECM includes provisions for the provision of office facilities and administrative services, with costs based on the allocable portion of GECM's overhead[118] - The aggregate amount of brokerage commissions paid by the company during the three most recent fiscal years is approximately $220, with $134 paid to Imperial Capital, LLC, representing 100% of the aggregate brokerage commissions during the most recent fiscal year[124] - As of December 31, 2022, approximately $100.8 million in principal amount of the company's debt investments bore interest at variable rates, which are generally based on LIBOR, SOFR, or US Prime Rate[351] - A prolonged increase in interest rates could increase the company's gross investment income and potentially its net investment income, provided that such increases are not offset by a decrease in the spread over variable rates earned on portfolio investments[351]