Great Elm Capital Corp.

Great Elm Capital Corp. (GECC) operates as a closed-end, externally managed, non-diversified management investment company, regulated as a Business Development Company (BDC) under the Investment Company Act of 1940 and electing to be treated as a Regulated Investment Company (RIC) for tax purposes ¹. The company aims to generate current income and capital appreciation through debt and income-generating equity investments, primarily in secured and senior secured debt instruments of middle market companies, defined as those with enterprise values between $100 million and $2 billion ¹. GECC also invests in collateralized loan obligations (CLOs) and related warehouse facilities through its joint venture, CLO Formation JV, LLC, and makes debt and equity investments in companies and operating platforms that originate and/or service commercial specialty finance businesses ¹.

GECC competes for investments with other BDCs, investment funds (including private equity, hedge, mezzanine, and small business investment companies), and traditional financial services companies such as commercial banks and direct lending funds ¹. Many competitors are larger with greater financial, technical, and marketing resources, and some have a lower cost of capital and access to funding sources unavailable to GECC ¹. GECC's competitive advantage is stated to stem from the underserved market for investments in lower middle-market companies by traditional financing sources ¹. The company's portfolio is concentrated in a limited number of portfolio companies and industries, with Structured Finance and Specialty Finance representing approximately 16.0% ¹ and 12.9% ¹ of total investments at fair value as of December 31, 2025, respectively ¹.

The core business model involves generating revenue primarily from interest on debt investments, supplemented by dividends on equity investments, capital gains from dispositions, and lease, fee, and other income ¹. Debt investments typically have an expected maturity of three to five years and generally pay interest quarterly or semi-annually ¹. Some debt and preferred stock investments may defer payments of cash interest or dividends or utilize payment-in-kind (PIK) ¹. GECC's primary operating expenses include a base management fee, administration fees, and an incentive fee paid to its external investment manager, Great Elm Capital Management, LLC (GECM) ¹. The base management fee is 1.50% ¹ of average adjusted gross assets, including assets purchased with borrowed funds ¹. The incentive fee has two components: an Income Incentive Fee based on pre-incentive fee net investment income exceeding a 1.75% ¹ quarterly hurdle rate (7.00% ¹ annualized), and a Capital Gains Incentive Fee based on cumulative aggregate realized capital gains less cumulative aggregate realized capital losses and aggregate unrealized capital depreciation, calculated from April 1, 2022 ¹.

As of December 31, 2025, GECC's total investments at fair value were $331.071 million ¹, including $218.381 million ¹ in non-affiliated, non-controlled investments, $32.803 million ¹ in non-affiliated, non-controlled short-term investments, and $79.887 million ¹ in controlled investments ¹. The portfolio consisted of 68 debt instruments across 53 companies, totaling approximately $203.5 million ¹ at fair value, and 21 equity investments in 18 companies, with an aggregate fair value of approximately $94.8 million ¹. The weighted average yield for the portfolio at December 31, 2025, was 11.66% ¹.

For the year ended December 31, 2025, total investment income was $49.988 million ¹, an increase from $39.323 million ¹ in 2024 ¹. Interest income was $31.007 million ¹ in 2025, down from $31.541 million ¹ in 2024 ¹. Dividend income significantly increased to $16.643 million ¹ in 2025 from $6.925 million ¹ in 2024 ¹. Total expenses rose to $32.090 million ¹ in 2025 from $26.522 million ¹ in 2024 ¹. Net investment income before taxes was $17.898 million ¹ in 2025, up from $12.801 million ¹ in 2024 ¹. Net realized loss on investments was $(5.285) million ¹ in 2025, compared to a net realized gain of $1.874 million ¹ in 2024 ¹. The net change in unrealized depreciation on investments was $(43.601) million ¹ in 2025, a larger depreciation than the $(10.771) million ¹ in 2024 ¹. Net assets at period end were $112.946 million ¹ in 2025, down from $136.113 million ¹ in 2024 ¹. Diluted EPS for 2025 was $(2.57) ¹, compared to $0.36 ¹ in 2024 ¹. Cash and cash equivalents were $1.834 million ¹ at December 31, 2025 ¹. Total notes payable (including unamortized discount) were $189.319 million ¹ at December 31, 2025 ¹.

The increase in dividend income in 2025 was primarily due to the investment in CLO Formation JV, LLC, which was formed in the prior year and pays periodic dividends to its equity holders ¹. The increase in total expenses was mainly driven by higher interest expense due to the issuance of $57.5 million ¹ in GECCG Notes, partially offset by the redemption of $18.5 million ¹ in GECCO Notes ¹. Management fees increased due to a larger average debt investment portfolio size ¹. Unrealized depreciation in 2025 was primarily due to decreases in the fair value of investments in First Brands (approximately $16.9 million ¹), CLO JV (approximately $11.3 million ¹), Del Monte Foods Corp. (approximately $5.2 million ¹), Maverick Gaming LLC (approximately $4.1 million ¹), and Flexsys Holdings (approximately $4.5 million ¹) ¹. The decline in First Brands was attributed to alleged fraudulent activity, while CLO JV's decline was due to broader market pressures affecting CLO equity valuations ¹. Del Monte Foods Corp.'s decrease reflected a bankruptcy filing and auction process, and Flexsys Holdings' decrease was due to a weaker outlook for domestic tire production ¹.

During 2025, GECC acquired $178.134 million ¹ in portfolio investments and had dispositions of $(158.200) million ^{1 1}. Net cash used in operating activities was approximately $2.8 million ¹ in 2025, reflecting purchases and proceeds from sales of investments and principal repayments offset by net investment income ¹. Cash provided by financing activities was $4.6 million ¹, including $57.5 million ¹ in net proceeds from GECCG Notes and $27.3 million ¹ from common stock issuances, partially offset by $58.7 million ¹ in net payments on GECCZ and GECCO Notes redemptions and $19.2 million ¹ in distributions ¹.

GECC's Board has set a distribution for the quarter ending March 31, 2026, at a rate of $0.30 ¹ per share, payable on March 31, 2026, to stockholders of record as of March 16, 2026 ¹. This distribution will be paid in cash and will be entirely from distributable earnings ¹.

In February 2026, GECM waived all accrued and unpaid incentive fees through March 31, 2026 ¹. As of December 31, 2025, approximately $2.3 million ¹ of accrued incentive fees were payable ¹. GECC expects to recognize the reversal of these accrued incentive fees during the period ending March 31, 2026, which will result in a corresponding increase in net income in that period ¹.

GECC believes it has sufficient liquidity available to meet its short-term and long-term obligations for at least the next 12 months and for the foreseeable future thereafter ¹. The company's ability to achieve its investment objective depends on GECM's ability to identify, evaluate, and monitor, and GECC's ability to finance and invest in, companies that meet its investment criteria ¹.

Regarding capital allocation, GECC repurchased $18.5 million ¹ of the outstanding principal on the GECCO Notes in December 2025 ¹. On February 27, 2026, GECC issued a notice to redeem an additional $20 million ¹ aggregate principal amount of the GECCO Notes on March 31, 2026 ¹. Pro forma for the reversal of accrued incentive fees and this GECCO Notes redemption, net assets would be $115.1 million ¹ and net asset value per share would be $8.23 ^{1 1}.

GECC's ability to grow depends on its ability to raise equity capital and/or access debt financing ¹. The company intends to periodically access the capital markets to raise cash for new investments ¹. As a RIC, GECC must distribute at least 90% ¹ of its investment company taxable income to stockholders, meaning these distributions are not available to fund new investments ¹. Consequently, GECC must borrow from financial institutions or issue additional securities to fund its growth ¹.

GECC faces several material risks, including intense competition for investment opportunities from larger entities with greater resources and lower costs of capital, which could lead to less attractive investment terms or substantial capital loss ¹. The portfolio's concentration in a limited number of companies and industries, such as Structured Finance (16.0% ¹) and Specialty Finance (12.9% ¹) as of December 31, 2025, exposes GECC to significant loss if a single investment or industry performs poorly ¹. Investments in middle-market and privately held companies carry high risks, including weaker financial positions, vulnerability to economic downturns, dependence on key personnel, and limited access to capital markets, which could impair their ability to repay obligations ¹. Distressed lending risks are present when investing in companies experiencing financial difficulties, potentially leading to substantial or complete loss ¹. The illiquidity of GECC's investments may hinder timely disposition, especially if rapid liquidation is required, potentially realizing significantly less than recorded values ¹. Economic recessions or downturns could impair portfolio companies, increase non-performing assets, decrease portfolio value, and raise funding costs ¹. Global economic, political, and market conditions, including new tariffs enacted in 2025 and proposed by the current U.S. Presidential administration, geopolitical tensions, inflation, and interest rate volatility, could adversely affect GECC's business, investments, and profitability ¹. Cybersecurity threats, including those amplified by artificial intelligence technologies, pose risks of unauthorized access, system failures, data breaches, and increased compliance costs, potentially disrupting business operations and damaging reputation ¹. The incentive fee structure may incentivize GECM to pursue riskier or more speculative investments, or to use leverage when it may not be prudent, as the base management fee is calculated on gross assets including leveraged funds, and the income incentive fee is based on pre-incentive fee net investment income, potentially leading to fees being paid on accrued but uncollected income ¹. GECC's ability to incur additional debt is limited by an asset coverage ratio of 150% ¹ under the Investment Company Act, and failure to maintain this could restrict distributions and impair business operations ¹.

Management's message to shareholders emphasizes the company's strategy to generate both current income and capital appreciation through debt and income-generating equity investments, particularly in secured and senior secured debt instruments of middle market companies, as well as investments in collateralized loan obligations and specialty finance businesses. They highlight the role of GECM's experienced investment team in identifying and monitoring investments, focusing on downside protection and attractive returns. Management has communicated a distribution for the quarter ending March 31, 2026, at a rate of $0.30 ¹ per share, payable on March 31, 2026, to stockholders of record as of March 16, 2026, noting that this distribution will be paid in cash and from distributable earnings. A significant forward-looking statement is the waiver of all accrued and unpaid incentive fees through March 31, 2026, by GECM, which is expected to result in an approximate $2.3 million ¹ increase in net income during the first quarter of 2026. Management also noted the planned redemption of $20 million ¹ aggregate principal amount of GECCO Notes on March 31, 2026. The strategic priorities appear to be focused on maintaining sufficient liquidity, with management stating confidence in meeting short-term and long-term obligations, and continuing to grow the investment portfolio through accessing capital markets for new investment opportunities, while managing expenses and optimizing capital structure, as evidenced by the recent debt redemptions and issuances.