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Item 7. Management’s Discussion and Analysis

2025-09-02 compared with 2024-08-29 · 62 added, 74 removed, 94 unchanged (59% of the section changed)

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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 BDC, and Monomoy UpREIT, an industrial-focused real estate investment trust, in addition to other investment vehicles.

GEG and its subsidiaries currently manage GECC, a publicly-traded BDC, and Monomoy UpREIT, an Industrial Outdoor Storage ( ISO ) focused real estate investment trust, in addition to other investment vehicles.

The combined assets under management of these entities at June 30, 2025 was approximately $758.5 million.

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As of the date of this report, GEG had no unfunded binding commitments to make additional investments.

On December 30, 2022, GEG and its wholly-owned subsidiary, FM Acquisition, entered into the Stock Purchase Agreement with JPM to sell 61 shares of the common stock, $0.001 par value per share, of Forest owned by FM Acquisition and GEG, which constituted 61% of the issued and outstanding shares of Forest’s common stock, to JPM for approximately $18.4 million in cash.

In connection with the Stock Purchase Agreement, GEG, JPM and Forest entered into the Stockholders Agreement.

Pursuant to the Stockholders Agreement, from January 17, 2023 until February 17, 2023, GEG had the the Put Option to sell its remaining 19% interest in Forest for its then fair market value.

On January 17, 2023, GEG exercised the Put Option and sold the Investment in Forest for approximately $26.5 million in cash.

On January 3, 2023, GEG’s wholly-owned subsidiary, Great Elm DME Holdings, Inc., along with the minority owners of Great Elm Healthcare, LLC ( HC LLC ), entered into a purchase agreement with QHM Holdings, Inc., a subsidiary of Quipt Home Medical Corp ( Quipt ), to sell 100% of the outstanding membership interests in HC LLC to Quipt (the Sale of HC LLC ) for $80.0 million, consisting of approximately $72.8 million in cash, $5.2 million of indebtedness assumed by Quipt and $2.0 million in shares of Quipt common stock based on the 20-day volume-weighted average price of Quipt’s common stock for the period ending on and including the second business day prior to the closing of the transaction.

After transaction costs of $2.5 million, distributions to non-controlling interests of $5.9 million, and indemnity escrow payment of $0.4 million, cash proceeds to GEG and its subsidiaries were $64.1 million, pending finalization of working capital adjustments.

The disposal group satisfied the criteria for presentation as held for sale and discontinued operations through the date of sale, and as such GEG's historical segment information was recast to reflect its ongoing business as a single reportable segment and to remove the activity of discontinued operations.

In January 2023, MBTS, GEG's wholly-owned subsidiary, completed purchases of certain land parcels.

In January 2023, MBTS completed the purchase of certain land parcels in Mississippi and Florida.

MBTS completed its third purchase, a land parcel in Florida, in March 2025.

Contemporaneously with the land purchases, MBTS entered into commercial lease agreements, as a lessor, in respect to the land parcels and build-to-suit improvements to be constructed thereon.

The leases will commence upon substantial completion of the build-to-suit development.

GEG intends to sell the land and improvements with the attached leases at or close to the respective lease commencement date.

During the year ended June 30, 2024, GEG capitalized development costs of $8.5 million attributed to the cost of land and development and construction costs directly identifiable with the two real estate projects.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ).

The leases commence upon substantial completion of the build-to-suit developments and MBTS looks to sell the land and improvements with the attached leases at, or subsequent to, the respective lease commencement date.

In June 2024, MBTS sold one of its developments and in December 2024, the lease for another development commenced.

During the year ended June 30, 2025, GEG capitalized development costs of $3.4 million attributed to the cost of land and development and construction costs directly identifiable with the real estate projects.

On February 4, 2025, GEG acquired certain assets of Greenfield CRE ( Greenfield ), a construction management company and previous partner of MCRE ( Greenfield Acquisition ).

In connection with the acquisition, the Company formed Monomoy Construction Services, LLC ( MCS ), a wholly owned subsidiary of GEG, and combined Greenfield's assets with the assets of Monomoy BTS Construction Management, LLC ( MCM ) to launch an integrated, full-service construction business.

MCS will be dedicated to serving the Company's various real estate businesses, as well as expanding its existing third-party consulting business.

The financial results of MCS are included in the Company's consolidated results for the period beginning on February 4, 2025.

Critical Accounting Estimates

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ).

The preparation of financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

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Actual results could be different from these estimates.

The historical results of the DME business and related activity have been presented in the accompanying consolidated statements of operations for the years ended June 30, 2024 and June 30, 2023 as discontinued operations.

On January 3, 2023, we sold our DME business.

The historical results of the DME business and related activity have been presented in the accompanying consolidated statements of operations for the year ended June 30, 2024 as discontinued operations.

See Note 18 - Discontinued Operations in the accompanying Notes to the Consolidated Financial Statements.

Following presentation of our DME business as discontinued operations, the Company views its operations and manages its business as one operating segment 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.

Asset Acquisitions

Asset acquisitions are accounted for using the cost accumulation method while business combinations are accounted for at fair value.

Determining whether the acquired set represents an asset acquisition or a business combination requires quantitative and qualitative assessments subject to judgment.

The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors, and long-term growth expectations.

The Company utilizes third-party specialists to assist management with the identification and valuation of intangible assets using customary valuation procedures and techniques.

Revenue Recognition

The Company recognizes revenue at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customers under agreements with each investment product, which may be terminated at any time by either party subject to the specific terms of each respective agreement.

Our revenues primarily consist of proceeds from the sale of build-to-suit properties and fees from managed investment products.

Fees from managed investment products include fees based on a percentage of assets under management, fees based on rents collected, fees based on the performance of managed assets, and administration and service fees.

Business Combinations

Business combinations are accounted for at fair value.

Acquisition costs are expensed as incurred and recorded in selling, general and administrative expenses.

Measurement period adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.

All changes that do not qualify as measurement period adjustments are also included in current period earnings.

The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed.

The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent

consideration if applicable, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.

If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed.

Income taxes are accounted for under the asset and liability method.

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Total other income (expense), net

Income (loss) before income taxes from continuing operations

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Revenues for the year ended June 30, 2024 increased $9.2 million, as compared to the prior year.

Of the $9.2 million increase, $6.6 million is related to MBTS's June 2024 asset sale, which is offset by $5.5 million of cost of revenues related to the sale.

The remaining $2.6 million expansion is primarily driven by increases in management and incentive fees from GECC as a result of increases in assets under management.

(Loss) income before income taxes from continuing operations

Income tax benefit (expense)

Net (loss) income from continuing operations

Revenues and Cost of Revenues

Revenues and cost of revenues for the year ended June 30, 2025 decreased $1.5 million and $4.4 million, respectively, as compared to the prior year.

The decreases were primarily due to a decrease in real estate property sales and related cost of revenue from those sales, as there was only $1.2 million of real estate property sales in the current year, offset by $1.1 million of related costs of revenue, compared to $6.6 million of real estate sales and $5.5 million of related cost of revenues in the prior year, due to the majority of revenue being earned on MBTS' June 2024 asset sale in the prior year and a similar transaction not occurring in the current year.

The decrease in revenue was offset by a $2.6 million increase in management and incentive fees from GECC as a result of increases in assets under management from the prior year period.

Additionally, $0.9 million of project management fee revenue was recognized from our newly acquired construction business in the current year period, whereas the business was not around in the prior year period.

Operating Costs and Expenses

Operating costs and expenses for the year ended June 30, 2025 increased $3.1 million, as compared to the prior year.

Investment management expenses increased $0.8 million, which was mainly attributable to costs associated with business operations due to our company now functioning primarily as an investment management company.

Other selling, general and administrative expenses decreased $0.6 million, which was mainly attributed to a decrease in our strategic initiative costs and other professional and operating fees due to our transition from a primarily durable medical equipment business to an asset management firm.

Other Expenses and Income

Interest expense for the year ended June 30, 2024 decreased by $1.7 million, compared to the prior year, primarily due to the decrease in interest expense attributed to the 35,010 shares of preferred stock issued by Forest to JPM on December 29, 2020 (the Forest Preferred Stock ) following the Sale of Controlling Interest in Forest on December 30, 2022.

During the year ended June 30, 2024, the Company recognized $11.3 million of other income (net), comprised of dividends and interest income of $8.1 million and net realized and unrealized gain on investments of $2.2 million, partially.

During the year ended June 30, 2023, the Company recognized $32.0 million of other income (net), comprised of gain on Sale of Controlling Interest in Forest of $10.5 million, gain on the Investment in Forest of $24.4 million, and dividends and interest income of $6.2 million, partially offset by net realized and unrealized loss on investments (excluding the Investment in Forest) of $9.2 million.

Investment management expenses increased $3.4 million, primarily driven by increased personnel costs due to the Greenfield Acquisition, along with changes to our personnel cost allocations by entity related to increased activity at certain entities which caused increased personnel allocation to investment management entities as opposed to other selling, general and administrative expense entities.

Additionally, a $0.5 million reduction in expense related to contingent consideration was recognized in the prior year period which is not applicable in the current year period investment management expenses.

Non-cash compensation increased $0.3 million, as compared to the prior year, primarily due to a large amount of shares awarded and vested in the current year compared to prior year.

Depreciation and amortization increased $0.1 million, as compared to the prior year, primarily due to depreciation related to construction completion and a related lease commencing on a building during the current year which was still construction in process in the prior year, along with increased depreciation on office furniture due to acquiring a new office space during the current year.

Other selling, general and administrative expenses decreased $0.7 million, which was mainly attributable to a decrease in personnel costs allocated to the business entities related to other selling, general and administrative, as mentioned previously, along with a decrease in tax consulting expense, primarily driven by prior year including expenses related to previous years and entities which are no longer around in the current year.

Other Income (Expense)

Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses.

For the year ended June 30, 2025, net realized and unrealized gains increased $14.6 million as compared to the corresponding prior year period, primarily due to a significant unrealized gain being recognized on one of our investments in a private fund due to its announcement of a public offering which drove up the value significantly in the current year, along with a change in valuation technique for our special purpose vehicles in the current year increasing unrealized gains on these entities.

For the year ended June 30, 2025, interest income decreased $1.5 million as compared to the corresponding prior year period, due to changes in the investment portfolio shifting away from interest earning marketable securities to other strategic private investments.

For the year ended June 30, 2025, dividend income decreased $0.4 million as compared to the corresponding prior year period, primarily due to a one-time redemption on investment in the prior year period.

The Company recognized an income tax expense from continuing operations of $0.1 million and $0.1 million for the years ended June 30, 2025 and 2024, respectively.

This expense consisted of federal and state and local taxes for the year ended June 30, 2024.

No federal income taxes were incurred for the year ended June 30, 2023.

The expense for the year ended June 30, 2025 consists of the recognition of income tax expense related to the deferred tax liability with an indefinite reversal period.

This is offset by the income tax benefit recognized from the reversal of the prior year's income tax expense, resulting from provision-to-return adjustments.

The expense for the year ended June 30, 2024 consisted of federal and state and local taxes.

As of June 30, 2025, we had $7.7 million of net operating loss carryforwards for federal income tax purposes, of which approximately $1.5 million will expire in fiscal years 2026 through 2038 and $6.2 million can be carried forward indefinitely.

Discontinued Operations

The following table provides the consolidated results of our discontinued operations:

For the twelve months ended June 30,

(in thousands)

As of June 30, 2025, the Company also had $7.9 million of state NOL carryforwards, principally in Massachusetts, that will expire from 2037 to 2045.

Discontinued Operations

Durable medical equipment sales and services revenue

Durable medical equipment rental income

Cost of durable medical equipment sold and services

Cost of durable medical equipment rentals

Durable medical equipment other operating expenses

Depreciation and amortization

Transaction costs

Interest expense

Loss on extinguishment of debt

Other (expense) income, net

Gain on disposal of discontinued operations

Income before income taxes from discontinued operations

Income tax benefit

Net income from discontinued operations

During the year ended June 30, 2023, the results of the discontinued DME business only included operations through the date of its sale (January 3, 2023).

Upon sale of the DME business, we initially recognized a gain on sale of $13.6 million.

In the fourth quarter of fiscal 2023, we recorded a loss of $0.3 million following finalization of working capital adjustments to the initial sales price for HC LLC, with the respective payment made to Quipt in September 2023.

There was minimal operating activity related to discontinued operations during the year ended June 30, 2024.

During the year ended June 30, 2023, the Company sold its DME business and the related activity qualified for presentation as discontinued operations.

There was no activity related to discontinued operations during the year ended June 30, 2025.

There was $0.02 million of net income related to discontinued operations during the year ended June 30, 2024.

Liquidity and Capital Resources

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Net cash provided by (used in) operating activities - continuing operations

Net cash provided by (used in) operating activities - discontinued operations

Net cash provided by (used in) operating activities

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Net cash provided by (used in) financing activities - continuing operations

Net cash provided by (used in) financing activities - discontinued operations

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents, including cash and cash equivalents classified within current assets held for sale

net increase in cash and cash equivalents classified within current assets held for sale

cash received from discontinued operations

Net change in cash and cash equivalents

As of June 30, 2024, we had an unrestricted cash balance of $48.1 million, short-term investments in marketable securities of $9.9 million and investments with a fair value of $44.6 million, including 1,518,162 shares of GECC common stock with an estimated fair value of $16.2 million.

Net change in cash, cash equivalents and restricted cash

As of June 30, 2025, we had an unrestricted cash balance of $30.6 million and investments with a fair value of $60.6 million, including 1,438,079 shares of GECC common stock with an estimated fair value of $15.3 million.

We intend to make acquisitions that will likely result in our investment of all of our liquid financial resources, the issuance of equity securities and the incurrence of indebtedness.

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Cash flows used in operating activities of our continuing operations for the year ended June 30, 2025 were $9.0 million.

The adjustments to reconcile our net loss from continuing operations of $0.9 million to net cash used in operating activities included add-backs for net proceeds from sale of real estate of $6.2 million and for various non-cash charges, such as $2.4 million of stock-based compensation expense, $2.4 million of non-cash interest and amortization of capitalized issuance costs, and $1.1 million of depreciation and amortization, which was partially offset by a $0.5 million of change in fair value of contingent consideration payable to ICAM, $2.3 million of realized gain on redemption of Convertible Notes, $12.0 million of purchases of investments and the net negative change in our operating assets and liabilities of $11.2 million.

The adjustments to reconcile our net income from continuing operations of $15.6 million to net cash used in operating activities included various non-cash charges, such as $2.0 million of stock-based compensation expense, $2.2 million of non-cash interest and amortization of capitalized issuance costs, and $1.2 million of depreciation and amortization, which all remained substantially consistent with prior year inflows.

These were offset by a $16.0 million unrealized gain on investments which was primarily driven by a $11.5 million gain on our investment in a private fund as its announcement of a public offering drove up the price significantly, and an additional $4.7 million of gains in our special purpose vehicles due to a change in valuation technique during the year.

Additionally, the cash inflows were offset by a net negative change in our operating assets and liabilities of $14.5 million, which was driven by an increase in receivables from managed funds due to additional receivables related to our newly acquired business which was not present in the prior year, along with different timing of reimbursements in the current year compared to the prior year.

Offsetting this was a decrease in purchases of investments by our consolidated fund compared to prior year due to heightened purchasing activity in the prior year by the consolidated fund, which was established during fiscal year 2024 and ramped up activity throughout the year.

The consolidated fund had increased cash flows from principal payments in the current year compared to prior year due to it now being an established fund.

Cash flows used in operating activities of our continuing operations for the year ended June 30, 2024 were $15.6 million.

The adjustments to reconcile our net income from continuing operations of $14.5 million to net cash used in operating activities included add-backs for various non-cash charges, such as $2.6 million of stock-based compensation expense, $2.3 million of non-cash interest and amortization of capitalized issuance costs, $1.2 million of depreciation and amortization, and $0.8 million of change in fair value of contingent consideration payable to ICAM, which was partially offset by deduction of $10.9 million of unrealized gain on our investments, $4.3 million of realized gain on our investments, $10.5 million of gain on Sale of Controlling Interest in Forest in December 2022, and the net negative change in our operating assets and liabilities of $0.7 million.

During the year ended June 30, 2023 we also received $1.6 million attributed to sales of investments by GESOF.

Cash flows provided by operating activities of our discontinued operations for the year ended June 30, 2023 were $0.8 million.

Cash flows used in investing activities of our continuing operations for the year ended June 30, 2025 were $1.3 million, which includes related party loan receivable of $8.0 million which we did not have in the prior year but which reaches maturity in January 2026.

Cash flows used in investing activities also includes purchases of investments in held-to-maturity securities of $7.4 million, offset by proceeds from settlement of held-to-maturity investments of $17.5 million, which each differed from prior year due to changes in the investment portfolio shifting away from interest earning marketable securities to other strategic private investments.

Further, investments in portfolio funds of $4.5 million for the year ended June 30, 2025 were driven by an investment in an additional special purpose vehicle during the year, which decreased from prior year due to investment in two special purpose vehicles in the prior year.

Additionally, cash flows used in investing activity included the acquisition of Greenfield of $2.5 million and redemption of investments of $3.9 million.

Cash flows provided by investing activities of our continuing operations for the year ended June 30, 2024 were $3.2 million which is attributed to the proceeds from settlement of held-to-maturity securities of $65.1 million and sales of investments of $6.8 million, partially offset by purchases of investments of $19.6 million and purchases of investments in held-to-maturity securities of $49.0 million.

Cash flows used in investing activities of our discontinued operations for the year ended June 30, 2024 of $0.9 million were attributed to investing activities of our DME business.

Cash flows provided by investing activities of our continuing operations for the year ended June 30, 2023 were $16.7 million which is attributed to the combined proceeds from sale of Forest, net of cash sold, of $44.3 million, partially offset by purchases of investments of $3.1 million and purchases of investments in marketable securities of $24.4 million.

Cash flows provided by investing activities of our discontinued operations for the year ended June 30, 2023 of $67.2 million were primarily attributed to the cash proceeds from the Sale of HC LLC, net of cash sold and before transaction costs and distributions to non-controlling interests, of $71.3 million, partially offset by other investing activities of our DME business.

Cash flows provided by financing activities of our continuing operations for the year ended June 30, 2024 were $2.8 million, which is attributed to contributions of non-controlling interests in our Consolidated Funds, offset by a redemption of the Convertible Notes and share repurchase.

Cash flows used in financing activities of our continuing operations for the year ended June 30, 2023 were $42.4 million, which consisted of principal payments of $38.1 million on the promissory note issued to Forest on December 29, 2022 and fully repaid by January 3, 2023, and principal payments of $3.7 million on the Seller Note, as well as distributions to non-controlling interests in GESOF of $0.6 million.

Cash flows used in financing activities of our discontinued operations for the year ended June 30, 2023 of $5.2 million were primarily attributed to distributions to non-controlling interests upon Sale of HC LLC of $5.9 million.

Cash flows used in financing activities of our continuing operations for the year ended June 30, 2025 were $8.8 million primarily due to a large increase in stock repurchases and the repurchase of Convertible Notes.

Cash flows provided by financing activities of our continuing operations for the year ended June 30, 2024 were $2.8 million, which is attributed to contributions of non-controlling interests in our consolidated funds, offset by a redemption of Convertible Notes and stock repurchase.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis