Great Elm Capital (GECC) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited consolidated financial statements are incorporated by reference and begin on page F-17 - The unaudited consolidated financial statements for the period ended March 31, 2023, are incorporated by reference, beginning on page F-17[8][13] Management's Discussion and Analysis of Financial Condition and Results of Operations The company details its Q1 2023 performance, highlighting investment income growth and portfolio expansion Overview GECC operates as a BDC investing in middle-market companies and specialty finance to generate income and appreciation - GECC's investment objective is to generate both current income and capital appreciation through debt and income-generating equity investments[14] - The company focuses on middle-market companies with enterprise values between $100 million and $2 billion[14] - A wholly-owned subsidiary, Great Elm Specialty Finance, LLC (GESF), oversees specialty finance investments[15] - The company is a Regulated Investment Company (RIC), requiring distribution of at least 90% of its taxable income to stockholders17 Portfolio and Investment Activity The company's investment portfolio reached $226.9 million with a debt portfolio yield of 13.06% in Q1 2023 Investment Activity for Q1 2023 | Metric | Value (in thousands) | | :--- | :--- | | Acquisitions | $53,293 | | Dispositions | ($57,175) | | Weighted Average Yield (End of Period) | 13.06% | Portfolio Reconciliation for Q1 2023 | Metric | Value (in thousands) | | :--- | :--- | | Beginning Investment Portfolio, at fair value | $224,957 | | Net change in unrealized appreciation | $3,473 | | Net realized gain | $1,850 | | Ending Investment Portfolio, at fair value | $226,939 | Top 3 Portfolio Industries by Fair Value (March 31, 2023) | Industry | Fair Value (in thousands) | Percentage of Fair Value | | :--- | :--- | :--- | | Specialty Finance | $56,589 | 24.94% | | Chemicals | $26,204 | 11.55% | | Insurance | $14,591 | 6.43% | Results of Operations Total investment income rose to $8.4 million in Q1 2023, driven by portfolio growth and higher interest rates Investment Income Comparison (Q1 2023 vs Q1 2022) | Income Category | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Interest income | $6,630 | $4,041 | | Dividend income | $934 | $1,267 | | Other income | $846 | $250 | | Total Investment Income | $8,410 | $5,558 | - The increase in interest income was driven by portfolio growth and rising rates, with the average debt coupon reaching 11.8%[38] Key Expense and Gain/Loss Comparison (Q1 2023 vs Q1 2022) | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Total Expenses | $5,543 | ($497) | | Incentive fees | $710 | $0 | | Incentive fee waiver | $0 | ($4,854) | | Net Realized Gain (Loss) | $1,845 | ($19,933) | | Net change in unrealized appreciation | $3,476 | $8,870 | Liquidity and Capital Resources The company maintains sufficient liquidity with $12.4 million in cash and money market funds and a 159.8% asset coverage ratio - As of March 31, 2023, the company had approximately $1.6 million in cash and $10.8 million in money market fund investments[52] - The company had approximately $21.0 million in unfunded loan commitments as of March 31, 2023[53] Outstanding Debt as of March 31, 2023 | Debt Instrument | Principal Outstanding (in millions) | Maturity Date | | :--- | :--- | :--- | | Revolving Credit Facility | $5.0 | May 5, 2024 | | 6.75% Notes (GECCM) | $45.6 | January 31, 2025 | | 6.50% Notes (GECCN) | $42.8 | June 30, 2024 | | 5.875% Notes (GECCO) | $57.5 | June 30, 2026 | - The company's asset coverage ratio was 159.8%, exceeding the required minimum of 150%[67] Distributions and Share Price The company declared a $0.35 per share distribution for Q1 2023, with its stock trading at a discount to NAV Q1 2023 Share Price and NAV Data | Metric | Value per Share | | :--- | :--- | | NAV (as of March 31, 2023) | $11.88 | | Closing Sales Price - High | $9.75 | | Closing Sales Price - Low | $8.50 | | Discount to NAV (High Price) | (17.9)% | | Discount to NAV (Low Price) | (28.5)% | - A distribution of $0.35 per share was declared for the first quarter ended March 31, 2023[71] - The board set the Q2 2023 distribution at $0.35 per share, payable in cash from distributable earnings[73] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, with a 100 basis point rate change impacting net income by ~$1.2 million - As of March 31, 2023, the company held debt investments with a principal of $117.3 million at variable rates and $112.8 million at fixed rates[75] Interest Rate Sensitivity Analysis (as of March 31, 2023) | Reference Rate Change | Annual Increase (Decrease) in Net Investment Income (in thousands) | | :--- | :--- | | +3.00% | $3,670 | | +2.00% | $2,447 | | +1.00% | $1,223 | | -1.00% | ($1,224) | | -2.00% | ($2,448) | | -3.00% | ($3,664) | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective[81] - No material changes in internal control over financial reporting occurred during the quarter[82] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, including two specific lawsuits detailed in the notes - The company is a defendant in a lawsuit, Intrepid Investments, LLC v. London Bay Capital, related to its Speedwell Holdings investment[206] - The company is involved in legal proceedings with Willis Pumphrey related to a loan from its predecessor[207] Risk Factors No material changes to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K were reported - No material changes in risk factors were reported for the period covered by this report[85] Exhibits This section lists filed exhibits, including CEO/CFO certifications and financial statements in inline XBRL format - The exhibits include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and financial data in XBRL format (Exhibit 101)[87] Consolidated Financial Statements Consolidated Statements of Assets and Liabilities Total net assets were $90.3 million as of March 31, 2023, with a Net Asset Value (NAV) per share of $11.88 Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total investments | $307,499 | $301,084 | | Total assets | $314,065 | $310,112 | | Total liabilities | $223,757 | $225,303 | | Total net assets | $90,308 | $84,809 | | Net asset value per share | $11.88 | $11.16 | Consolidated Statements of Operations The company reported a net increase in net assets from operations of $8.2 million, or $1.07 per share, for Q1 2023 Statement of Operations Summary (For the three months ended March 31, 2023, in thousands) | Line Item | Amount | | :--- | :--- | | Total investment income | $8,410 | | Net expenses | $5,543 | | Net investment income | $2,839 | | Net realized and unrealized gains | $5,321 | | Net increase in net assets from operations | $8,160 | | Earnings per share (basic and diluted) | $1.07 | Consolidated Schedule of Investments The investment portfolio's fair value was $307.5 million, primarily concentrated in U.S. specialty finance and chemicals Investment Composition as of March 31, 2023 | Investment Type | Fair Value (in thousands) | Percentage of Net Assets | | :--- | :--- | :--- | | Debt | $184,050 | 203.80% | | Equity/Other | $42,889 | 47.49% | | Short-Term Investments | $80,560 | 89.21% | | Total | $307,499 | 340.50% | - As of March 31, 2023, 24.91% of total assets were non-qualifying, which is below the 30% regulatory limit[107] Notes to the Unaudited Consolidated Financial Statements The notes detail accounting policies, fair value measures, debt terms, and a 9.59% total return on NAV for the quarter - In March 2022, the investment manager waived $4.9 million in accrued incentive fees, which is not subject to recapture[164] Fair Value Hierarchy of Investments (March 31, 2023, in thousands) | Level | Fair Value | | :--- | :--- | | Level 1 | $87,109 | | Level 2 | $98,025 | | Level 3 | $119,149 | | Measured at NAV | $3,216 | | Total Investments | $307,499 | - The company effected a 6-for-1 reverse stock split on February 28, 2022, with all per-share data retroactively adjusted[202][128] - As of March 31, 2023, the company had approximately $21.0 million in unfunded loan commitments[204]