Great Elm Group, Inc.: Form 10-Q for the period ended Mar 31, 2025

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 March 31, 2025 was approximately $768 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 nine months ended March 31, 2025 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)

Revenue

Revenues for the three months ended March 31, 2025 increased $0.4 million as compared to the three months ended March 31, 2024 primarily due to an additional $0.3 million of management fees recognized due to increased assets under management at GECC. Additionally, $0.4 million of project management fees were recognized for the three months ended March 31, 2025, related to our construction services business which we acquired in the current period. These increases were partially offset by a reduction in Incentive Fee revenue of $0.5 million compared to the prior year period due to restrictions on the underlying fund's ability to pay such fees until certain metrics are met.

Revenues for the nine months ended March 31, 2025 increased $1.8 million as compared to the nine months ended March 31, 2024 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 $0.9 million of management fees were also recognized in the nine months ended March 31, 2025 compared to the prior year period due to increased assets under management at GECC. Furthermore, $0.5 million of project management fees were recognized for the nine months ended March 31, 2025 related to our construction services business which was not around in the corresponding prior year period. These increases were offset by a reduction in Incentive Fees of $1.1 million compared to the prior year period.

Operating Costs and Expenses

Investment management expenses for the three and nine months ended March 31, 2025 increased $1.2 million and $1.6 million, respectively, as compared to the corresponding prior year periods primarily driven by increased personnel due to business growth. Additionally, a $0.5 million reduction in expense related to contingent consideration was recognized in the prior year periods which is not applicable in the current year period. Other selling, general and administrative expenses for the three and nine months ended March 31, 2025 decreased $0.3 million and $0.7 million, respectively, as compared to the corresponding prior year periods, due to a reduction in professional fees and other expenses.

Other Income (Expense)

Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses. For the three and nine months ended March 31, 2025, interest income decreased $0.4 million and $1.3 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. For the three and nine months ended March 31, 2025, dividend income decreased $0.6 million and $0.4 million, respectively, as compared to the corresponding prior year periods, primarily due to a one-time redemption on investment in the corresponding prior year period.

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 months ended March 31, 2025, realized and unrealized loss decreased by $0.3 million. Current period losses were primarily driven by a decrease in our investments in GECC of $1.2 million. For the nine months ended March 31, 2025, realized and unrealized gain increased by $2.0 million as compared to the corresponding prior year period. These gains were primarily driven by $3.1 million of gains related to the special purpose vehicle which had a significant loss in the corresponding prior year period. Additionally, unrealized gains of $1.1 million were recorded in the nine months ended March 31, 2025 on an investment in a special purpose vehicle which was 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 and a decrease in share price.

Liquidity and Capital Resources

Cash Flows

Cash used in operating activities of our continuing operations for the nine months ended March 31, 2025 was $11.2 million. The adjustments to reconcile our net loss from continuing operations of $0.2 million to net cash used in operating activities included add-backs for various non-cash charges, such as $1.5 million of stock-based compensation expense, $1.6 million of non-cash interest and amortization of capitalized issuance costs, $0.3 million realized loss on investments and $0.9 million of depreciation and amortization, which was offset by a deduction of $4.1 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $12.5 million, including the impact of changes related to consolidated funds.

Cash used in operating activities of our continuing operations for the nine months ended March 31, 2024 were $18.5 million. The adjustments to reconcile our net loss from continuing operations of $0.4 million to net cash used in operating activities included add-backs for various non-cash charges, such as $1.8 million of stock-based compensation expense, $1.7 million of non-cash interest and amortization of capitalized issuance costs, and $0.8 million of depreciation and amortization, which was offset by deduction of $1.8 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $11.6 million, including the impact of changes related to consolidated funds.

Cash used in investing activities of our continuing operations for the nine months ended March 31, 2025 were $0.8 million, which includes related loan receivable of $7.5 million, purchases of investments in held-to-maturity securities of $7.4 million, investments in portfolio funds of $4.5 million and acquisition of business of $2.5 million, offset by proceeds from settlement of held-to-maturity investments of $17.5 million and redemption of investments of $3.9 million.

Cash used in investing activities of our continuing operations for the nine months ended March 31, 2024 were $3.7 million, which includes investment purchases of $59.8 million partially offset by the proceeds from sale of investments of $56.8 million. Cash flows used in investing activities of our discontinued operations for the nine months ended March 31, 2024 were $0.9 million, which represents the payments made to the buyer and former minority interest holders of our durable medical equipment business in connection with working capital adjustment and escrow payments.

Cash used in financing activities of our continuing operations for the nine months ended March 31, 2025 were $6.2 million primarily due to stock repurchases.

Cash provided by financing activities of our continuing operations for the nine months ended March 31, 2024 were $7.1 million related to capital activity of Consolidated Funds.

Financial Condition

As of March 31, 2025, we had an unrestricted cash balance of $31.5 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 $14.7 million as of March 31, 2025, 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.

Borrowings

As of March 31, 2025, the Company had $26.9 million in outstanding aggregate principal amount of 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 March 31, 2025, 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.

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.

We evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2025. 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 March 31, 2025, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2025, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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.