Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

On April 23, 2024, we contributed investments in certain CLOs and formed a joint venture, the CLO Formation JV, LLC (the "CLO JV") to facilitate the creation of CLOs. The CLO JV invests primarily in the subordinated note securities in CLOs (colloquially referred to as "CLO equity"), as well as loan accumulation facilities (colloquially referred to as "CLO warehouses"). CLO subordinated note securities are entitled to recurring distributions which are generally equal to the residual cash flow of payments received from underlying securities after contractual payments to more senior CLO mezzanine debt holders and fund expenses.

On September 1, 2023, we contributed investments in certain of our operating company subsidiaries and other specialty finance assets to our formerly wholly owned subsidiary, Great Elm Specialty Finance, LLC ("GESF") in exchange for equity and subordinated indebtedness in GESF. In connection with this contribution, a strategic investor purchased approximately 12.5% of the equity interests and subordinated indebtedness in GESF. Through its subsidiaries, GESF provides a variety of financing options along a "continuum of lending" to middle-market borrowers, including receivables factoring, asset-based and asset-backed lending, lender finance, and equipment financing. GESF expects to generate both revenue and cost synergies across its specialty finance company subsidiaries.

On September 27, 2016, we and Great Elm Capital Management, LLC ("GECM"), our external investment manager, entered into an investment management agreement (the "Investment Management Agreement") and an administration agreement (the "Administration Agreement"), and we began to accrue obligations to our external investment manager under those agreements. On August 1, 2022, upon receiving our stockholders' approval, we and GECM entered into an amendment to the Investment Management Agreement to reset the capital gains incentive fee to begin on April 1, 2022, which eliminated $163.2 million of realized and unrealized losses incurred prior to April 1, 2022 in calculating future incentive fees. In addition, the incentive fee based on income was amended to reset the mandatory deferral commencement date used in calculating deferred incentive fees to April 1, 2022. The Investment Management Agreement renews for successive annual periods, subject to requisite approvals from our board of directors (our "Board") and/or stockholders.

We have elected to be treated as a RIC for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify as a RIC, we must, among other things, meet source-of-income and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our investment company taxable income on a timely basis. If we qualify as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger and acquisition activity, pricing in the high yield and leveraged loan credit markets, our expectations of future investment opportunities, the general economic environment as well as the competitive environment for the types of investments we make.

As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements.

Revenues

We generate revenue primarily from interest on the debt investments that we hold. We may also generate revenue from dividends on the equity investments that we hold, capital gains on the disposition of investments and other income. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Our debt investments generally pay interest quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or payment-in-kind ("PIK"). In addition, we may generate revenue in the form of prepayment fees, commitment, origination, due diligence fees, end-of-term or exit fees, fees for providing significant managerial assistance, consulting fees and other investment-related income.

Expenses

Our primary operating expenses include the payment of a base management fee, administration fees (including the allocable portion of overhead under the Administration Agreement), and, depending on our operating results, an incentive fee. The base management fee and incentive fee remunerates GECM for work in identifying, evaluating, negotiating, closing and monitoring our investments. The Administration Agreement provides for reimbursement of costs and expenses incurred for office space rental, office equipment and utilities allocable to us under the Administration Agreement, as well as certain costs and expenses incurred relating to non-investment advisory, administrative or operating services provided by GECM or its affiliates to us. We also bear all other costs and expenses of our operations and transactions. In addition, our expenses include interest on our outstanding indebtedness.

Critical Accounting Policies and Estimates

Valuation of Portfolio Investments

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of us; (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary); (3) are able to transact for the asset; and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, are valued at fair value using a valuation process consistent with our Board-approved policy.

GECM, as the Board's valuation designee, approves in good faith the valuation of our portfolio as of the end of each quarter, subject to the general oversight of the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may impact the market quotations used to value some of our investments.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples, security covenants, call protection provisions, information rights and the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, and merger and acquisition comparables; and enterprise values.

We prefer the use of observable inputs and minimize the use of unobservable inputs in our valuation process. Inputs refer broadly to the assumptions that market participants would use in pricing an asset. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset developed based on the best information available in the circumstances.

Both observable and unobservable inputs are subject to some level of uncertainty and assumptions used bear the risk of change in the future. We utilize the best information available to us, including the factors listed above, in preparing the fair valuations. In determining the fair value of any individual investment, we may use multiple inputs or utilize more than one approach to calculate the fair value to assess the sensitivity to change and determine a reasonable range of fair value. In addition, our valuation procedures include an assessment of the current valuation as compared to the previous valuation for each investment and where differences are material understanding the primary drivers of those changes, incorporating updates to our current valuation inputs and approaches as appropriate.

Revenue Recognition

Interest and dividend income, including PIK income, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts ("OID"), earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early repayment of a loan or debt security are recognized when earned and are included in interest income.

We may purchase debt investments at a discount to their face value. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method unless there are material questions as to collectability.

We assess the outstanding accrued income receivables for collectability at least quarterly, or more frequently if there is an event that indicates the underlying portfolio company may not be able to make the expected payments. If it is determined that amounts are not likely to be paid we may establish a reserve against or reverse the income and put the investment on non-accrual status.

Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the specific identification method.

Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment fair values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Portfolio and Investment Activity

The following is a summary of our investment activity for the year ended December 31, 2025 and the three months ended March 31, 2026:

Portfolio Reconciliation

The following is a reconciliation of the investment portfolio for the three months ended March 31, 2026 and the year ended December 31, 2025. Investments in short-term securities, including U.S. Treasury Bills and money market mutual funds, are excluded from the table below.

Portfolio Classification

The following table shows the fair value of our portfolio of investments by industry as of March 31, 2026 and December 31, 2025 (in thousands):

Results of Operations

Investment Income

Investment income consists of interest income, including net amortization of premium and accretion of discount on loans and debt securities, dividend income and other income, which primarily consists of amendment fees, commitment fees and funding fees on loans.

Interest income decreased for the three months ended March 31, 2026 as compared to the corresponding period in the prior year primarily due to a lower average coupon rate across the portfolio combined with a decrease in the debt investment portfolio size. As of March 31, 2026, the debt investment portfolio had an average coupon rate of 10.9% on approximately $199.2 million of principal as compared to 11.7% on approximately $256.2 million of principal as of March 31, 2025, excluding positions on non-accrual in each period. Interest income includes PIK interest which is reported in the Statements of Operations. The total PIK interest earned remained consistent for the three months ended March 31, 2026 as compared to the corresponding period in the prior year.

Dividend income decreased for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025 due to fewer holdings in dividend-paying equity investments and reductions in distributions from the investment in the CLO JV which distributed $2.5 million and $3.3 million for the three months ended March 31, 2026 and 2025, respectively.

Other income decreased for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025 primarily due to non-refundable carry fees, early repayment fees, and amendment fees on new and amended debt positions received during the three months ended March 31, 2025. These were one-time fees on investments and were not received during the three months ended March 31, 2026.

Expenses

Expenses are largely comprised of advisory fees and administration fees paid to GECM and interest expense on our outstanding notes payable. See "-Liquidity and Capital Resources." Advisory fees include management fees and incentive fees calculated in accordance with the Investment Management Agreement, and administration fees include direct costs reimbursable to GECM under the Administration Agreement and fees paid for sub-administration services.

Management fees decreased for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025 due to a decrease in the underlying management fee assets, primarily due to a decline in the fair value of the portfolio of investments, in the current year period as compared to the corresponding prior year period.

Effective February 2026, GECM waived all accrued and unpaid incentive fees through March 31, 2026. As of December 31, 2025, there were approximately $2.3 million of accrued and unpaid incentive fees on our balance sheet. For the three months ended March 31, 2026, an additional $0.5 million of incentive fees were accrued, resulting in $2.8 million of accrued and unpaid incentive fees. In connection with the incentive fee waiver, we recognized the reversal of these accrued and unpaid incentive fees during the three months ended March 31, 2026, resulting in a corresponding increase in net income and increase in net asset value in the period (subject to any offsetting additional expenses or losses). The incentive fee waiver is not subject to recapture. Effective April 2026, GECM waived all accrued and unpaid incentive fees through June 30, 2026.

Professional services costs increased for the three months ended March 31, 2026 as compared to the corresponding period in the prior year, primarily due to general rate increases for professional services, including legal and accounting fees, along with certain one-time fees.

Administration fees increased for the three months ended March 31, 2026 as compared to the corresponding period in the prior year primarily due to higher allocable overhead and other expenses incurred by GECM under the Administration Agreement.

Realized Gains (Losses)

Realized gain for the three months ended March 31, 2026 includes approximately $2.7 million from the realization of our investment in Stone Ridge Opportunities Fund, LP ("Stone Ridge") and $0.7 million from the partial realization of our investment in the unsecured bond of American Coastal Insurance Corp ("American Coastal"). Realized losses for the three months ended March 31, 2026 were primarily driven by a $0.2 million loss on the sale of our equity investment in the State Street Blackstone Senior Loan ETF, $0.2 million from the partial realization of our investment in the first lien term loan of Auction.com, and $0.1 million from the partial realization of our investment in the first lien second out term loan of Conuma Resources LTD. The remaining $0.6 million of realized losses was attributable to smaller positions, none of which were individually material, and reflected routine portfolio activity.

Realized gain for the three months ended March 31, 2025 includes $0.2 million in gains from the realization of our investment in W&T Offshore Inc. secured bonds. Realized losses for the three months ended March 31, 2025 includes $0.1 million in loss from the realization of our investment in Dynata, LLC ("Dynata", formerly known as Research Now Group, Inc.) common equity.

Change in Unrealized Appreciation (Depreciation) on Investments

For the three months ended March 31, 2026, net unrealized depreciation was primarily attributable to (i) approximately $3.8 million of unrealized depreciation related to our investment in CLO JV, driven by decreases in the fair value of the underlying CLO investments and (ii) approximately $2.3 million of net unrealized depreciation related to our investment in Universal Fiber Systems, LLC ("Universal Fibers"). In addition, unrealized depreciation included approximately $2.6 million attributable to the reversal of previously recognized unrealized appreciation on our investment in Stone Ridge and approximately $1.1 million attributable to the reversal of previously recognized unrealized appreciation on our investment in American Coastal, in each case in connection with the realization activity discussed above.

These unrealized losses were partially offset by unrealized appreciation attributable to increases in the fair value of (i) approximately $0.5 million related to our investment in CW Opportunity 2 LP, (ii) approximately $0.4 million related to our investment in W&T Offshore, Inc., and (iii) approximately $0.3 million related to our investment in Trouvaille RE Ltd. In addition, unrealized appreciation included approximately $1.1 million attributable to the reversal of previously recognized unrealized depreciation on our investment in Del Monte Food Corp II, Inc., primarily in connection with a $1.6 million partial paydown of our junior debtor-in-possession loan.

For the three months ended March 31, 2025, unrealized appreciation was primarily driven by an increase in fair value of our investment in Trouvaille Re Ltd. preference shares of approximately $0.8 million and in our investment in Dynata common equity of approximately $0.8 million. Unrealized depreciation for the three months ended March 31, 2025 was primarily driven by a decrease in fair value of our investment in CLO JV common equity of approximately $1.9 million and in our investment in CW Opportunity 2, LP of approximately $1.1 million.

Liquidity and Capital Resources

We generate liquidity through our operations with cash received from investment income and sales and paydowns on investments. Such proceeds are generally reinvested in new investment opportunities, distributed to shareholders in the form of dividends, or used to pay operating expenses. We also receive proceeds from our issuances of notes payable and our revolving credit facility and from time to time may raise additional equity capital. See "-Revolver" and "-Notes Payable" below for more information regarding our outstanding credit facility and notes.

As of March 31, 2026, we had approximately $9.6 million of short term investments in money market fund investments. As of March 31, 2026, we had investments in 65 debt instruments across 49 companies, totaling approximately $190.4 million at fair value and 18 equity investments in 15 companies, with an aggregate fair value of approximately $76.8 million.

In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at some future date or over a specified period of time. As of March 31, 2026, we had approximately $1.3 million in unfunded commitments to provide financing to certain of our portfolio companies. We had sufficient availability on our Revolver as well as cash and other liquid assets on our March 31, 2026 balance sheet to satisfy the unfunded commitments.

For the three months ended March 31, 2026, net cash provided by operating activities was approximately $23.5 million, reflecting $54.5 million provided by the sales of investments and principal payments offset by $25.9 million used for the purchase of investments and $6.5 million from the change in short-term investments.

For the three months ended March 31, 2026, net cash used for financing activities was $25.3 million. Cash outflows included $20.4 million to repurchase and redeem the 5.875% notes due 2026 (the "GECCO Notes"), $0.5 million from the repurchases of common stock, and $4.2 million in distributions to stockholders.

We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months and for the foreseeable future thereafter.

Contractual Obligations and Cash Requirements

A summary of our material contractual payment and other cash obligations as of March 31, 2026 is as follows:

See "-Revolver" and "-Notes Payable" below for more information regarding our outstanding credit facility and notes.

We have certain contracts under which we have material future commitments. Under the Investment Management Agreement, GECM provides investment advisory services to us. For providing these services, we pay GECM a fee, consisting of two components: (1) a base management fee based on the average value of our total assets and (2) an incentive fee based on our performance.

We are also party to the Administration Agreement with GECM. Under the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and other such services as our administrator.

If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.

Both the Investment Management Agreement and the Administration Agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other.

Revolver

On May 5, 2021, we entered into a Loan, Guarantee and Security Agreement (the "Loan Agreement") with City National Bank ("CNB"). The Loan Agreement provides for a senior secured revolving line of credit (the "Revolver") of up to $25 million (subject to a borrowing base as defined in the Loan Agreement). We may request to increase the revolving line in an aggregate amount not to exceed $25 million, which increase is subject to the sole discretion of CNB. In November 2023, we entered into an amendment to the Loan Agreement extending the maturity date of the revolving line to May 5, 2027. We are required to pay a commitment fee of 0.50% per annum on any unused portion of the revolving line of credit when less than $25 million is drawn; if borrowings are $25 million or more on the facility, the commitment fee decreases to 0.25% per annum on any unused portion of the revolving line of credit.

On August 13, 2025, we amended the Loan Agreement to increase the commitment of the revolving line of credit to up to $50 million (subject to a borrowing base as defined in the Loan Agreement). The amendment also allows us to request an increase of the Revolving Facility in an aggregate amount not to exceed $40 million (up to a revolving line of $90 million), which increase is subject to the sole discretion of CNB and updates the maturity date of the revolving line to the earlier of (i) May 5, 2027 and (ii) May 31, 2026 if the Company's 5.875% notes due 2026 have not been refinanced prior to such date. In addition, the amendment provides that borrowings under the Revolving Facility shall bear interest at a rate equal to (i) at all times when a minimum deposit test is met (a) SOFR plus 2.50% or (b) a base rate plus 1.50% and (ii) at all times when a minimum deposit test is not met (a) SOFR plus 3.50% or (b) a base rate plus 2.50%. The amendment also amended the financial covenant of minimum net assets requirement to be of not less than $80 million. As of March 31, 2026, there were no borrowings outstanding under the revolving line.

Borrowings under the revolving line are secured by a first priority security interest in substantially all of our assets, subject to certain specified exceptions. We have made customary representations and warranties and are required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar loan agreements. In addition, the Loan Agreement contains financial covenants requiring (i) net assets of not less than $80 million, (ii) asset coverage equal to or greater than 150% and (iii) bank asset coverage equal to or greater than 300%, in each case tested as of the last day of each fiscal quarter of the Company. Borrowings are also subject to the leverage restrictions contained in the Investment Company Act of 1940, as amended (the "Investment Company Act").

Share Price Data

The following table sets forth: (i) NAV per share of our common stock as of the applicable period end, (ii) the range of high and low closing sales prices of our common stock as reported on the Nasdaq Global Market during the applicable period, (iii) the closing high and low sales prices as a premium (discount) to NAV during the relevant period, and (iv) the distributions per share of our common stock declared during the applicable period. Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount or premium to NAV is separate and distinct from the risk that our NAV will decrease. During the last two fiscal years, our common stock has generally traded below NAV.

During fiscal years 2024 and 2025 and through April 27, 2026, using the high and low sales prices within each fiscal quarter compared to the NAV at such quarter end, our common stock has traded as high as a 14.4% premium to NAV and as low as a 38.8% discount to NAV.

For all periods presented in the table above, there was no return of capital included in any distribution.

The last reported closing price for our common stock on April 27, 2026 was $5.52 per share. As of April 27, 2026, we had 12 record holders of our common stock.

Distributions

The following table summarizes our distributions declared for record dates since January 1, 2024:

Recent Developments

Distribution

Our board set the distribution for the quarter ending June 30, 2026 at a rate of $0.25 per share. The full amount of each distribution will be from distributable earnings. The distribution will be payable on June 30, 2026 to stockholders of record as of June 15, 2026. The distribution will be paid in cash.

Interest Rate Risk

We are also subject to financial risks, including changes in market interest rates. As of March 31, 2026, approximately $146.0 million in principal amount of our debt investments bore interest at variable rates, which are generally based on SOFR or US prime rate, and many of which are subject to certain floors. Recently, interest rates have risen and a prolonged increase in interest rates will increase our gross investment income and could result in an increase in our net investment income if such increases in interest rates are not offset by a corresponding decrease in the spread over variable rates that we earn on any portfolio investments or an increase in our operating expenses. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for an analysis of the impact of hypothetical base rate changes in interest rates.