Great Elm Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 BDC, and Monomoy UpREIT, an Industrial Outdoor Storage ( IOS ) focused real estate investment trust, in addition to other investment vehicles. The combined assets under management of these entities at September 30, 2025 was approximately $792 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. Change in Segments During the first quarter of fiscal 2026, the Company realigned the information that the Chief Operating Decision Maker ( CODM ) regularly reviews to evaluate performance for operating decision-making purposes, including performance assessment and allocation of resources. As a result of this change in segment reporting, the Company retrospectively recast prior period results, by segment, to conform to the current period presentation. This structure includes two reportable segments: Alternative Credit and Real Estate. The structure is based on the Company’s various investment strategies. As a result of the change noted above, effective for the quarter ended September 30, 2025, the Company began reporting the following business segments: • Alternative Credit - focused on income generation and capital preservation through investment in debt and income-generating securities, direct lending, CLOs, and specialty finance businesses including Factoring, Asset Based Lending and Healthcare • Real Estate - full service, end-to-end real estate platform combining investment expertise and turnkey execution capabilities for IOS sector The Company has a corporate office that is included in “Corporate & Other”. The corporate office supports the segments by providing infrastructure and administrative support in the areas of accounting/finance, operations, information technology, legal, compliance and human resources. 25 Results of Operations The following table provides the results of our consolidated operations: For the three months ended September 30, (in thousands) 2025 Percent Change 2024 Revenues $ 10,788 170% $ 3,992 Cost of Revenues 6,748 *NM 635 Operating costs and expenses: Compensation and benefits 5,237 47% 3,563 Selling, general and administrative 2,166 44% 1,501 Depreciation and amortization 342 25% 273 Expenses of Consolidated Funds 21 31% 16 Total operating costs and expenses 7,766 5,353 Operating loss (3,726 ) (1,996 ) Other (expense) income: Interest expense (1,028 ) 0% (1,028 ) Other (expense) income, net (3,079 ) *NM 5,998 Total other (expense) income, net (4,107 ) 4,970 (Loss) income before income taxes (7,833 ) 2,974 Income tax expense (71 ) 0% - Net (loss) income $ (7,904 ) $ 2,974 *NM - not meaningful Revenue Revenues and cost of revenues for the three months ended September 30, 2025 increased $6.8 million and $6.1 million, respectively, as compared to the three months ended September 30, 2024, primarily due to an increase in Real Estate property sales revenues and related cost of revenues due to a September 2025 property sale. The increase in revenues were partially offset by a reduction in Incentive fees of $0.9 million compared to the prior year period. Operating Costs and Expenses Compensation and benefits expenses for the three months ended September 30, 2025 increased $1.7 million as compared to the corresponding prior year period primarily driven by increased personnel due to the Greenfield acquisition. Selling, general and administrative expenses for the three months ended September 30, 2025 increased $0.7 million as compared to the corresponding prior year period, which was mainly attributable to a an increase in selling, general and administrative expenses due to the acquisition of Greenfield. Depreciation and amortization increased $0.1 million, as compared to the prior year period, primarily due to an increase in depreciation and amortization due to the Greenfield Acquisition and depreciation expense on a building. Other Income (Expense) Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses. For the three months ended September 30, 2025, net realized and unrealized gains decreased $6.6 million as compared to the corresponding prior year period due to significant unrealized losses recorded in the current year period, primarily driven by a notable unrealized loss being recognized on one of our investments in a private fund in the current year period. For the three months ended September 30, 2025, interest income decreased $0.3 million as compared to the corresponding prior year period, due to changes in the investment portfolio shifting away from interest earning marketable securities into other strategic private investments. For the three months ended September 30, 2025, dividend income remained flat as compared to the corresponding prior year period. 26 Segment Analysis We conduct our operations through two business segments: Alternative Credit and Real Estate. Effective for the quarter ended September 30, 2025, we began reporting the following business segments. • Alternative Credit - focused on income generation and capital preservation through investment in debt and income-generating securities, direct lending, CLOs, and specialty finance businesses including Factoring, Asset Based Lending and Healthcare • Real Estate - full service, end-to-end real estate platform combining investment expertise and turnkey execution capabilities for IOS sector The Company has a corporate office that is included in “Corporate & Other”. The corporate office supports the segments by providing infrastructure and administrative support in the areas of accounting/finance, operations, information technology, legal, compliance and human resources. The primary measure used by CODM in measuring performance and allocating resources to the segments is net income, as reported on our condensed consolidated statements of operations, predominantly in the annual budget and forecasting process. The CODM considers budget-to-actual variances on a quarterly basis when making decisions about internal operations, such as staffing and related compensation, and planning for future investments. Alternative Credit Segment The following table provides the results of our Alternative Credit segment: For the three months ended September 30, (in thousands) 2025 Percent Change 2024 Revenues $ 1,580 (36)% $ 2,476 Operating costs and expenses: Compensation and benefits 1,607 12% 1,437 Selling, general and administrative 416 30% 321 Depreciation and amortization 69 5% 66 Total operating costs and expenses 2,092 1,824 Operating (loss) income $ (512 ) $ 652 Other income: Interest expense - 0% - Other income, net - 0% - Total other income, net - - (Loss) income before income taxes $ (512 ) $ 652 Income tax expense - 0% - Net (loss) income $ (512 ) $ 652 Alternative Credit Revenue Alternative Credit Revenues for the three months ended September 30, 2025 decreased $0.9 million as compared to the three months ended September 30, 2024 due to a reduction in Incentive Fee revenue compared to the prior year period as fees cannot be received yet from the underlying fund until certain performance metrics are met. Alternative Credit Expenses Alternative Credit compensation and benefits expense increased $0.2 million for the three months ended September 30, 2025 as compared to the corresponding prior year period primarily driven by an increase in non-cash compensation due to a larger amount of shares awarded and vested in the current period compared to the prior year period. Alternative Credit segment selling, general and administrative expenses increased $0.1 million as compared to the three months ended September 30, 2024 primarily due to an increase in legal and recruiting expenses. 27 Real Estate Segment The following table provides the results of our Real Estate segment: For the three months ended September 30, (in thousands) 2025 Percent Change 2024 Revenues $ 9,208 *NM $ 1,516 Cost of Revenues 6,748 *NM 635 Operating costs and expenses: Compensation and benefits 2,793 139% 1,170 Selling, general and administrative 682 *NM 133 Depreciation and amortization 273 32% 207 Total operating costs and expenses 3,748 1,510 Operating loss $ (1,288 ) $ (629 ) Other income: Interest expense - 0% - Other income, net 15 0% - Total other income, net 15 - Loss before income taxes $ (1,273 ) $ (629 ) Income tax expense - 0% - Net loss $ (1,273 ) $ (629 ) *NM - not meaningful Real Estate Revenue Real Estate revenues for the three months ended September 30, 2025 increased $7.7 million as compared to the three months ended September 30, 2024 primarily due to a $7.4 million sale of real estate property in the current year. Similarly, related costs of revenues increased by $6.1 million compared to the corresponding prior year period due to this sale. Additionally, there was a $0.7 million increase in revenue related to our construction services business compared to the corresponding prior year period given the Company had not yet acquired this business in the prior year period. Real Estate Expenses Real Estate segment compensation and benefits expenses for the three months ended September 30, 2025 increased $1.6 million as compared to the corresponding prior year period driven by increased personnel expense due to the Greenfield acquisition. Real Estate segment selling, general and administrative expenses increased $0.5 million for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 primarily due to increased legal, insurance and other expenses due to increased activity at these entities and the Greenfield acquisition. Depreciation and amortization increased $0.1 million, as compared to the prior year period due to amortization of intangible assets related to the Greenfield acquisition, along with depreciation related to a building owned which was not complete in the prior year period. 28 Corporate & Other The following table provides the results of Corporate & Other: For the three months ended September 30, (in thousands) 2025 Percent Change 2024 Operating costs and expenses: Compensation and benefits $ 837 (12)% $ 956 Selling, general and administrative 1,068 2% 1,047 Expenses of Consolidated Funds 21 31% 16 Total operating costs and expenses 1,926 2,019 Operating loss (1,926 ) (2,019 ) Other income (expense): Interest expense (1,028 ) 0% (1,028 ) Other (expense) income, net (3,094 ) *NM 5,998 Total other (expense) income, net (4,122 ) 4,970 (Loss) income before income taxes $ (6,048 ) $ 2,951 Income tax expense (71 ) 0% - Net (loss) income $ (6,119 ) $ 2,951 *NM - not meaningful Corporate & Other Operating Costs and Expenses Compensation and benefits expenses related to Corporate & Other for the three months ended September 30, 2025 decreased $0.1 million as compared to the corresponding prior year period due to a decrease in personnel costs allocated to the Corporate & Other. Corporate & Other Expenses For the three months ended September 30, 2025, net realized and unrealized gains decreased $6.6 million as compared to the corresponding prior year period due to a significant unrealized loss on one of our investments in a private fund. This was partially offset by a significant realized gain recorded in the private fund in the current year period. Additionally, in the corresponding prior year period $3.5 million of unrealized gains were recorded due to a change in valuation technique for our special purpose vehicles. In the current year period, an unrealized loss of $0.4 million was recorded on these entities. For the three months ended September 30, 2025, interest income decreased $0.3 million as compared to the corresponding prior year period, due to changes in the investment portfolio shifting away from interest earning marketable securities into other strategic private investments. Liquidity and Capital Resources Cash Flows Net cash from operating activities increased $9.6 million, from net cash used of $5.8 million for the three months ended September 30, 2024 to net cash provided of $3.8 million for the three months ended September 30, 2025, driven by proceeds from sale of real estate in September 2025 and changes in operating assets and liabilities period-over-period. Net cash from investing activities increased $6.9 million, from net cash provided of $2.5 million for the three months ended September 30, 2024 to net cash provided of $9.3 million for the three months ended September 30, 2025, driven by settlement of related party loan receivable and net sales of investments for the three months ended September 30, 2025. Net cash from financing activities increased $11.9 million, from net cash used of $2.2 million for the three months ended September 30, 2024 to net cash provided of $9.7 million for the three months ended September 30, 2025, driven by proceeds from issuance of common stock and lower stock repurchases during the three months ended September 30, 2025. 29 Financial Condition As of September 30, 2025, we had an unrestricted cash balance of $53.5 million, as compared to an unrestricted cash balance of $30.6 million as of June 30, 2025. We also held 1,358,276 shares of GECC common stock with an estimated fair value of $13.6 million as of September 30, 2025, as compared to 1,438,079 shares of GECC common stock with an estimated fair value of $15.3 million as of June 30, 2025. We believe we have sufficient liquidity available to meet our short-term and long-term obligations. Borrowings As of September 30, 2025, the Company had $26.9 million in outstanding aggregate principal amount of the GEGGL Notes. The GEGGL Notes are due on June 30, 2027, and interest 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 September 30, 2025, the Company had $35.1 million principal balance in outstanding Convertible Notes (including cumulative interest paid in-kind) held by a consortium of investors, including related parties, that 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. Critical Accounting Policies During the three months ended September 30, 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, 2025 as it relates to normal and recurring transactions. Critical accounting policies and estimates are those that require management’s most difficult, subjective or complex judgments and would therefore be deemed the most critical to an understanding of our results of operations and financial condition. Recent Accounting Developments See discussion of Recent Accounting Developments in Note 2 of the accompanying Condensed Consolidated Financial Statements. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. 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, 2025.