Great Elm Group, Inc.: Form 10-Q for the period ended Dec 31, 2024
Filed with the SEC on Feb 5, 2025 and accepted by EDGAR at Feb 5, 2025, 16:46 ET.
Management's discussion and analysis
As filed, 11,772 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Overview
GEG is a publicly-traded alternative asset management company focused on growing a scalable and diversified portfolio of long-duration and permanent capital vehicles across credit, real estate, specialty finance, and other alternative strategies. GEG and its subsidiaries currently manage GECC, a publicly-traded business development company, and Monomoy UpREIT, an industrial-focused real estate investment trust, in addition to other investment vehicles. The combined assets under management of these entities at December 31, 2024 was approximately $751 million.
GEG continues to explore other investment management opportunities, as well as opportunities in other areas that it believes provide attractive risk-adjusted returns on invested capital. As of the date of this report, GEG had no unfunded binding commitments to make additional investments.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future. During the six months ended December 31, 2024 we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 as it relates to normal and recurring transactions.
Results of Operations
The following table provides the results of our consolidated operations:
(in thousands)
| For the three months ended December 31, 2024 | Percent Change | 2023 | For the six months ended December 31, 2024 | Percent Change | 2023 | |
|---|---|---|---|---|---|---|
| Revenues | $3,507 | 24% | $2,819 | $7,499 | 22% | $6,129 |
| Cost of Revenues | (458) | NM | - | (1,093) | NM | - |
| Operating costs and expenses: | ||||||
| Investment management expenses, excluding non-cash compensation | (2,948) | 21% | (2,429) | (5,185) | 8% | (4,786) |
| Non-cash compensation | (755) | (10)% | (839) | (1,872) | 8% | (1,726) |
| Other selling, general and administrative | (1,039) | (47)% | (1,964) | (2,765) | (14)% | (3,197) |
| Depreciation and amortization | (284) | 0% | (283) | (557) | (2)% | (566) |
| Total operating costs and expenses | (5,026) | (5,515) | (10,379) | (10,275) | ||
| Operating loss | (1,977) | (2,696) | (3,973) | (4,146) | ||
| Other income (expense): | ||||||
| Interest expense | (1,030) | (3)% | (1,061) | (2,058) | (3)% | (2,123) |
| Other income (expense), net | 4,361 | 24% | 3,518 | 10,359 | 18% | 8,788 |
| Total other income (expense), net | 3,331 | 2,457 | 8,301 | 6,665 | ||
| (Loss) income before income taxes from continuing operations | $1,354 | $(239) | $4,328 | $2,519 |
Revenue
Revenues for the three months ended December 31, 2024 increased $0.7 million as compared to the three months ended December 31, 2023 primarily due to the recognition of $0.6 million of real estate property sales earned in the current quarter whereas there were no corresponding real estate property sales in the prior year period. An additional $0.3 million of management fees were also recognized in the three months ended December 31, 2024 compared to the prior year period due to increased assets under management at GECC. This increase was offset by a reduction in Incentive Fees of $0.2 million compared to the prior year period.
Revenues for the six months ended December 31, 2024 increased $1.4 million as compared to the six months ended December 31, 2023 primarily due to the recognition of $1.2 million of real estate property sales earned in the current year whereas there were no corresponding real estate property sales in the prior year. An additional $0.6 million of management fees were also recognized in the six months ended December 31, 2024 compared to the prior year period due to increased assets under management at GECC. This increase was offset by a reduction in Incentive Fees of $0.6 million compared to the prior year period.
Operating Costs and Expenses
Investment management expenses for the three and six months ended December 31, 2024 increased $0.5 million and $0.4 million, respectively, as compared to the corresponding prior year periods primarily driven by increased personnel due to business growth. Other selling, general and administrative expenses for the three and six months ended December 31, 2024 decreased $0.9 million and $0.4 million, respectively, as compared to the corresponding prior year periods, as the prior year periods included certain one-time professional fees associated with strategic initiatives and transactions which did not recur in the current year periods.
Other Income (Expense)
Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses. For the three and six months ended December 31, 2024, interest income decreased $0.5 million and $1.0 million, respectively, as compared to the corresponding prior year periods, due to changes in the investment portfolio shifting away from interest earning marketable securities into other strategic private investments.
Net realized and unrealized gains and losses generally consist of unrealized mark-to-market adjustments on investments and the gain or loss realized on the sale of investments. For the three and six months ended December 31, 2024, realized and unrealized gain increased by $1.2 million and $1.7 million, respectively, as compared to the corresponding prior year periods. These gains were primarily driven by unrealized gains of $1.0 million and $4.4 million recorded in the three and six months ended December 31, 2024, respectively, on investments in special purpose vehicles which were not held in the prior year. These were partially offset by a decrease in our investment in GECC compared to the prior year period due to additional shares vesting in the current year.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities of our continuing operations for the six months ended December 31, 2024 was $9.8 million. The adjustments to reconcile our net income from continuing operations of $4.3 million to net cash used in operating activities included add-backs for various non-cash charges, such as $1.0 million of stock-based compensation expense, $1.1 million of non-cash interest and amortization of capitalized issuance costs, $0.6 million realized loss on investments and $0.6 million of depreciation and amortization, which was offset by a deduction of $6.8 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $12.0 million, including the impact of changes related to consolidated funds.
Cash flows used in operating activities of our continuing operations for the six months ended December 31, 2023 were $19.9 million. The adjustments to reconcile our net income from continuing operations of $2.5 million to net cash used in operating activities included add-backs for various non-cash charges, such as $1.3 million of stock-based compensation expense, $1.1 million of non-cash interest and amortization of capitalized issuance costs, $0.6 million of depreciation and amortization, and $0.1 million of realized loss on our investments, which was offset by deduction of $4.6 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $17.2 million, including the impact of changes related to consolidated funds.
Cash provided by investing activities of our continuing operations for the six months ended December 31, 2024 were $9.9 million, which includes purchases of investments in held-to-maturity securities of $7.4 million and investments in portfolio funds of $3.9 million, offset by proceeds from settlement of held-to-maturity investments of $17.5 million and redemption of investments of $3.9 million.
Cash flows used in investing activities of our continuing operations for the six months ended December 31, 2023 were $7.7 million, which is attributed to investments in portfolio funds of $6.6 million, net purchases of held-to-maturity securities of $4.3 million, purchases of trading securities of $4.5 million, partially offset by the proceeds from sale of investments of $1.8 million. Cash flows used in investing activities of our discontinued operations for the six months ended December 31, 2023 were $0.4 million, which represents the payment made to the buyer of our DME business in September 2023 following finalization of the working capital adjustment.
Cash used in financing activities of our continuing operations for the six months ended December 31, 2024 were $5.5 million primarily due to stock repurchases.
Cash flows provided by financing activities of our continuing operations for the six months ended December 31, 2023 were $6.9 million related to capital activity of Consolidated Funds.
Financial Condition
As of December 31, 2024, we had an unrestricted cash balance of $44.3 million, as compared to an unrestricted cash balance of $48.1 million as of June 30, 2024. We also held 1,438,079 shares of GECC common stock with an estimated fair value of $15.8 million as of December 31, 2024, as compared to 1,518,162 shares of GECC common stock with an estimated fair value of $16.2 million as of June 30, 2024. We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months.
Borrowings
As of December 31, 2024, the Company had $26.9 million in outstanding aggregate principal amount of 7.25% notes due on June 30, 2027 (the GEGGL Notes). Interest on the GEGGL Notes is paid quarterly. The GEGGL Notes include covenants that limit additional indebtedness or the payment of dividends in the event that our net consolidated debt to equity ratio is, or would be on a pro forma basis, greater than 2 to 1. In addition, if our net consolidated debt to equity ratio is greater than 2 to 1 at the end of any calendar quarter, we must retain no less than 10% of our excess cash flow as cash and cash equivalents until such time as our net consolidated debt to equity ratio is less than 2 to 1 at the end of a calendar quarter.
As of December 31, 2024, the Company had $36.4 million principal balance in convertible notes outstanding (including cumulative interest paid in-kind). The convertible notes are held by a consortium of investors, including related parties. The convertible notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and December 31, in cash or in kind at the option of the Company. The convertible notes are due on February 26, 2030, but are convertible at the option of the holders, subject to the terms therein, prior to maturity into shares of our common stock. Upon conversion of any note, the Company will pay or deliver, as the case may be, to the noteholder, in respect of each $1,000 principal amount of notes being converted, shares of common stock equal to the conversion rate in effect on the conversion date, together with cash, if applicable, in lieu of delivering any fractional share of common stock. To date, all interest on these instruments has been paid in-kind.
Market risk
As filed, 152 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have been no material changes in the market risks discussed in Item 7A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2024.
Controls and procedures
As filed, 1,078 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2024. Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that the information we are required to disclose in reports that we file under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of December 31, 2024, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting for the quarter ended December 31, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Risk factors
As filed, 294 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We have disclosed the risk factors affecting our business, financial condition and operating results in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024. There have been no material changes from the risk factors previously disclosed.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-10-01 to 2024-12-31 | $3.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months2024-07-01 to 2024-12-31 | $7.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2024-10-01 to 2024-12-31 | $458.0k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months2024-07-01 to 2024-12-31 | $1.1m | us-gaap:CostOfRevenue |
| Selling, general and administrative | 3 months2024-10-01 to 2024-12-31 | $1.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months2024-07-01 to 2024-12-31 | $3.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2024-10-01 to 2024-12-31 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months2024-07-01 to 2024-12-31 | −$4.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2024-10-01 to 2024-12-31 | $1.0m | us-gaap:InterestExpense |
| Interest expense | 6 months2024-07-01 to 2024-12-31 | $2.1m | us-gaap:InterestExpense |
| Income tax | 3 months2024-10-01 to 2024-12-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2024-07-01 to 2024-12-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-10-01 to 2024-12-31 | $1.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months2024-07-01 to 2024-12-31 | $3.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-10-01 to 2024-12-31 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2024-07-01 to 2024-12-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-10-01 to 2024-12-31 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2024-07-01 to 2024-12-31 | $0.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-10-01 to 2024-12-31 | 28,767,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months2024-07-01 to 2024-12-31 | 39,793,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months2024-07-01 to 2024-12-31 | −$9.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 6 months2024-07-01 to 2024-12-31 | $5.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2024-12-31 | $44.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-12-31 | $124.4m | us-gaap:AssetsCurrent |
| Total assets | At period end2024-12-31 | $138.5m | us-gaap:Assets |
| Current liabilities | At period end2024-12-31 | $4.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2024-12-31 | $68.4m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-12-31 | $62.3m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-25-014593. Last ingested by Listed: Oct 24, 2026, 14:57 ET. Listed shows no prices and gives no investment advice.