Great Elm Capital (GECC) - 2021 Q4 - Annual Report

Investment Strategy and Operations - As of December 31, 2021, the company has expanded its investment allocation in specialty finance companies, focusing on various stages of capital provided to under-banked small and medium-sized businesses[24] - Prestige Capital Finance, LLC has factored over $6 billion in transactions over its 30 years of operation, serving clients with accounts receivable between $100 thousand and $10 million[20] - Research Now Group, Inc. conducts over 90 million surveys annually with a panel of 29 million active panelists, serving nearly 6,000 clients across various sectors[21] - GECM has formed Great Elm Specialty Finance, LLC to hold specialty finance-related investments, appointing Michael Keller as President[24] - Lenders Funding, LLC has supplied several hundred million dollars in funding since its formation, working with over 150 lenders and factors[19] - The company competes with other BDCs and investment funds, as well as traditional financial services companies, in securing investment opportunities[38] Management Fees and Incentive Structures - GECM's base management fee is calculated at an annual rate of 1.50% of the company's average adjusted gross assets, payable quarterly in arrears[45] - The Income Incentive Fee is based on pre-incentive fee net investment income, which includes interest and dividend income, minus operating expenses for the quarter[47] - The fixed hurdle rate for pre-incentive fee net investment income is set at 1.75% per quarter, equating to 7.00% annualized[49] - The pre-incentive fee net investment income is calculated at 20% of the amount exceeding 2.1875% in any calendar quarter, which annualizes to 8.75%[51] - The Capital Gains Incentive Fee is calculated as 20% of the positive difference between cumulative realized capital gains and cumulative realized capital losses, with no fee if the amount is negative[53] - For the year ended December 31, 2021, the company incurred $3.2 million in base management fees and $(4.3) million in income-based fees accrued during the period[60] - The company has no Capital Gains Incentive Fees earned for the years ended December 31, 2019, 2020, and 2021[60][61][62] - The company plans to waive remaining accrued incentive fees contingent upon shareholder approval for a reset of the incentive fee calculations in fiscal year 2022[335] - The Investment Management Agreement was most recently approved on July 29, 2021, and renews for successive annual periods subject to board approval[65] Financial Performance and Condition - Total expenses for the year ended December 31, 2021 decreased to $12.9 million from $15.7 million in 2020, primarily due to a reversal of $5.3 million in incentive fees[334] - Management fees increased to $3.2 million in 2021 from $2.5 million in 2020, driven by increases in the average fair value of total portfolio investments[336] - Interest expense rose to $10.4 million in 2021, attributed to the issuance of $57.5 million in GECCO Notes, partially offset by the redemption of GECCL Notes[339] - Net realized losses for the year ended December 31, 2021 were $9.6 million, compared to losses of $9.7 million in 2020, with gross realized gains of $8.1 million and losses of $17.8 million in 2021[340] - Net unrealized depreciation on investments for 2021 was $12.9 million, a significant improvement from $29.4 million in 2020, with unrealized appreciation of $54.4 million offset by depreciation of $67.3 million[342] Capital Structure and Obligations - As of December 31, 2021, the company had approximately $9.1 million in cash and cash equivalents and $150.0 million in debt instruments across 37 companies[348] - The company had approximately $31.9 million in unfunded loan commitments to provide debt financing to certain portfolio companies as of December 31, 2021[349] - Total contractual obligations as of December 31, 2021 amounted to $145.9 million, including $57.5 million in GECCO Notes and $42.8 million in GECCN Notes[355] - The company entered into a Loan Agreement providing a senior secured revolving line of credit of up to $25 million, with no borrowings outstanding as of December 31, 2021[360] - The company issued $28.4 million in 6.50% Notes due 2022 and redeemed them at 100% of the principal amount on July 23, 2021[363] - As of December 31, 2021, the aggregate principal balance of the GECCM Notes outstanding was $44.8 million, and the GECCN Notes outstanding was $41.7 million[364][365] - The company issued $50.0 million in 5.875% notes due 2026, with an outstanding balance of $55.4 million as of December 31, 2021[366] Regulatory Compliance and Taxation - The company must derive at least 90% of gross income from specified sources to qualify as a RIC under the Internal Revenue Code[82] - At least 50% of the market value of total assets must be represented by cash, U.S. Government securities, and other regulated investment companies[82] - The company may issue multiple classes of indebtedness and one class of stock senior to common stock if asset coverage is at least 150% immediately after issuance[80] - The company intends to distribute annually all or substantially all of its investment company taxable income and net capital gain to avoid U.S. federal income tax[85] - If the company fails to meet the 90% annual gross income requirement, all taxable income would be subject to corporate-level U.S. federal income tax[84] - The company is permitted to invest in temporary investments such as cash and U.S. government securities to meet qualifying asset requirements[79] Market Conditions and Future Outlook - The year ended December 31, 2020 saw significant decreases in LIBOR, which is the primary base rate referenced in the company's floating rate debt investments[333] - Interest rates began to rebound in 2021, and if they continue to rise, it may have a positive impact on interest income for fiscal year 2022[333] - The company is monitoring the impact of COVID-19 on its portfolio companies, which may affect investment income and financial condition[378][384] Shareholder Actions and Corporate Governance - The company announced a 6-for-1 reverse stock split effective February 28, 2022, converting every six shares into one[369] - The company set distributions at $0.60 per share for the quarter ending March 31, 2022, and $0.45 per share for the quarter ending June 30, 2022[371] - The company acquired a majority ownership interest in Sterling Commercial Credit, LLC for approximately $7.5 million, consisting of $4.9 million in cash and shares[372] - The company plans to waive all accrued and unpaid incentive fees as of March 31, 2022, pending stockholder approval, which could increase income and NAV[374] - The company has adopted a code of ethics to establish procedures for personal investments and restrict certain transactions by personnel[81]