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 March 31, 2026 was approximately $744 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. 28 Results of Operations The following table provides the results of our consolidated operations: For the three months ended March 31, For the nine months ended March 31, (in thousands) 2026 Percent Change 2025 2026 Percent Change 2025 Revenues $ 3,418 7% $ 3,209 $ 17,217 61% $ 10,708 Cost of Revenues - (100)% (11 ) 6,764 NM* 1,082 Operating costs and expenses: Compensation and benefits 5,307 33% 4,001 15,463 41% 10,989 Selling, general and administrative 1,591 14% 1,394 5,734 36% 4,207 Depreciation and amortization 313 (13)% 361 967 5% 918 Expenses of Consolidated Funds 177 NM 19 218 NM* 40 Total operating costs and expenses 7,388 5,775 22,382 16,154 Operating loss (3,970 ) (2,555 ) (11,929 ) (6,528 ) Other (expense) income: Interest expense (1,033 ) (1)% (1,039 ) (3,083 ) (0)% (3,097 ) Other (expense) income, net (8,430 ) *NM (907 ) (22,856 ) NM* 9,452 Total other (expense) income, net (9,463 ) (1,946 ) (25,939 ) 6,355 Loss before income taxes (13,433 ) (4,501 ) (37,868 ) (173 ) Income tax expense (87 ) 0% - (104 ) 0% - Net loss $ (13,520 ) $ (4,501 ) $ (37,972 ) $ (173 ) *NM - not meaningful Revenue Revenues for the three months ended March 31, 2026 decreased $0.2 million as compared to the three months ended March 31, 2025, driven by a decrease in Incentive Fees from the corresponding prior year period. Revenues and cost of revenues for the nine months ended March 31, 2026 increased $6.5 million and $5.7 million, respectively, as compared to the nine months ended March 31, 2025, 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 $1.6 million and an increase in Project management fees of $1.3 million compared to the prior year period. Operating Costs and Expenses Compensation and benefits expenses for the three months ended March 31, 2026 increased $1.3 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 March 31, 2026 increased $0.2 million as compared to the corresponding prior year period, which was mainly attributable to an increase in state franchise tax expense and other miscellaneous selling, general and administrative expenses. Compensation and benefits expenses for the nine months ended March 31, 2026 increased $4.5 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 nine months ended March 31, 2026 increased $1.5 million as compared to the corresponding prior year period, which was mainly attributable to an increase in accounting and tax consulting fees, along with an increase in selling, general and administrative expenses due to the acquisition of Greenfield. 29 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 March 31, 2026, net realized and unrealized loss increased $7.4 million as compared to the corresponding prior year period primarily driven by notable unrealized losses being recognized on our three special purpose vehicles in the current year period, along with a significant reduction in stock price for another of our investments during the current year period. For the three months ended March 31, 2026, dividend income decreased $0.2 million as compared to the corresponding prior year period, primarily driven by a decrease in the dividend rate per share held on one of our investments in the current period compared to the dividend rate per share held on one of our investments in the prior year period. For the three months ended March 31, 2026, interest income decreased $0.1 million as compared to the corresponding prior year period, as interest income was earned in the prior year on a loan which was fully paid down in the current year, Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses. For the nine months ended March 31, 2026, net realized and unrealized gains decreased $27.9 million to a net realized and unrealized loss as compared to the corresponding prior year period due to notable unrealized losses being recognized on our three special purpose vehicles in the current year period, as opposed to unrealized gains on these special purpose vehicles in the prior year period, along with a significant reduction in stock price for another one of our investments during the current year period, as opposed to an increase in stock price for this investment in the prior year period. Further, a notable unrealized loss was recognized on one of our investments in a private fund in the current year period as opposed to an unrealized gain on this investment in the prior year period. For the nine months ended March 31, 2026, interest income decreased $0.5 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 nine months ended March 31, 2026, dividend income decreased $0.4 million as compared to the corresponding prior year period, primarily driven by a decrease in the dividend rate per share held on one of our investments in the current period compared to the dividend rate per share held on one of our investments in the prior year period. 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. 30 Alternative Credit Segment The following table provides the results of our Alternative Credit segment: For the three months ended March 31, For the nine months ended March 31, (in thousands) 2026 Percent Change 2025 2026 Percent Change 2025 Revenues $ 1,545 (13)% $ 1,768 $ 4,619 (26)% $ 6,233 Operating costs and expenses: Compensation and benefits 1,643 3% 1,596 4,648 (1)% 4,688 Selling, general and administrative 313 25% 250 1,246 32% 941 Depreciation and amortization - (100)% 71 138 (32)% 204 Total operating costs and expenses 1,956 1,917 6,032 5,833 Operating (loss) income (411 ) (149 ) (1,413 ) 400 Other income: Interest expense - 0% - - 0% - Other income, net - 0% - - 0% - Total other income, net - - - - (Loss) income before income taxes (411 ) (149 ) (1,413 ) 400 Income tax expense - 0% - - 0% - Net (loss) income $ (411 ) $ (149 ) $ (1,413 ) $ 400 Alternative Credit Revenue Alternative Credit Revenues for the three months ended March 31, 2026 decreased $0.2 million as compared to the three months ended March 31, 2025 due to a $0.4 million reduction in Management Fee and Incentive Fee revenue compared to the prior year period. This reduction was partially offset by a $0.2 million increase in Administration Fee revenue in the current year period compared to the corresponding prior year period. Alternative Credit Revenues for the nine months ended March 31, 2026 decreased $1.6 million as compared to the nine months ended March 31, 2025 primarily due to a reduction in Incentive Fee revenue compared to the prior year period. Alternative Credit Expenses Alternative Credit compensation and benefits expense increased $47 thousand for the three months ended March 31, 2026 as compared to the corresponding prior year period primarily driven by an increase in personnel which was offset by a decrease in non-cash compensation expense due to a decline in the price of GECC common shares during 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 March 31, 2025 primarily driven by an increase in miscellaneous general and administrative expenses. Alternative Credit compensation and benefits expense remained flat for the nine months ended March 31, 2026 as compared to the corresponding prior year period. Alternative Credit segment selling, general and administrative expenses increased $0.3 million as compared to the nine months ended March 31, 2025 primarily driven by an increase in software expense and other miscellaneous general and administrative expenses. . 31 Real Estate Segment The following table provides the results of our Real Estate segment: For the three months ended March 31, For the nine months ended March 31, (in thousands) 2026 Percent Change 2025 2026 Percent Change 2025 Revenues $ 1,873 30% $ 1,441 $ 12,598 182% $ 4,475 Cost of Revenues - (100)% (11 ) 6,764 NM* 1,082 Operating costs and expenses: Compensation and benefits 2,850 79% 1,592 8,350 114% 3,908 Selling, general and administrative 558 (6)% 595 1,799 83% 985 Depreciation and amortization 251 (13)% 290 767 7% 714 Total operating costs and expenses 3,659 2,477 10,916 5,607 Operating loss (1,786 ) (1,025 ) (5,082 ) (2,214 ) Other income: Interest expense - 0% - - 0% - Other income, net 7 0% - 48 0% - Total other income, net 7 - 48 - Loss before income taxes (1,779 ) (1,025 ) (5,034 ) (2,214 ) Income tax benefit (expense) 27 0% - (89 ) 0% - Net loss $ (1,752 ) $ (1,025 ) $ (5,123 ) $ (2,214 ) *NM - not meaningful Real Estate Revenue Real Estate revenues for the three months ended March 31, 2026 increased $0.4 million as compared to the three months ended March 31, 2025 due to an increase in revenue related to our construction business which was acquired during the three months ended March 31, 2025. Real Estate revenues for the nine months ended March 31, 2026 increased $8.1 million as compared to the nine months ended March 31, 2025 primarily due to a property sale occurring in September 2025. Related costs of revenues for the nine months ended March 31, 2026 increased by $5.7 million compared to the nine months ended March 31, 2025 due to this sale. Further, $1.8 million of revenue was recognized in the nine months ended March 31, 2026 related to our construction business, compared to $0.3 million in the corresponding prior year period due to the growth in construction business from Greenfield acquisition that occurred in February 2025. Real Estate Expenses Real Estate segment compensation and benefits expenses for the three months ended March 31, 2026 increased $1.3 million as compared to the corresponding prior year period driven by increased personnel expense due to the Greenfield acquisition. Real Estate segment compensation and benefits expenses for the nine months ended March 31, 2026 increased $4.4 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 $0.8 million for the nine months ended March 31, 2026 compared to the nine months ended March 31, 2025 primarily due to increased accounting, insurance, software and other expenses due to increased activity at these entities and the Greenfield acquisition. Depreciation and amortization increased $53 thousand for the nine months ended March 31, 2026, as compared to the corresponding prior year period due to amortization of intangible assets related to the Greenfield acquisition. 32 Corporate & Other The following table provides the results of Corporate & Other: For the three months ended March 31, For the nine months ended March 31, (in thousands) 2026 Percent Change 2025 2026 Percent Change 2025 Operating costs and expenses: Compensation and benefits $ 814 0% $ 813 $ 2,465 3% $ 2,393 Selling, general and administrative 720 31% 549 2,689 18% 2,281 Depreciation and amortization 62 0% - 62 0% - Expenses of Consolidated Funds 177 NM 19 218 NM* 40 Total operating costs and expenses 1,773 1,381 5,434 4,714 Operating loss (1,773 ) (1,381 ) (5,434 ) (4,714 ) Other income (expense): Interest expense (1,033 ) (1)% (1,039 ) (3,083 ) (0)% (3,097 ) Other (expense) income, net (8,437 ) *NM (907 ) (22,904 ) NM* 9,452 Total other (expense) income, net (9,470 ) (1,946 ) (25,987 ) 6,355 (Loss) income before income taxes (11,243 ) (3,327 ) (31,421 ) 1,641 Income tax expense (114 ) 0% - (15 ) 0% - Net (loss) income $ (11,357 ) $ (3,327 ) $ (31,436 ) $ 1,641 *NM - not meaningful Corporate & Other Operating Costs and Expenses Compensation and benefits expenses related to Corporate & Other for the three months ended March 31, 2026 remained flat as compared to the corresponding prior year period. Selling, general and administrative expenses increased $0.2 million as compared to the corresponding prior year period which was mainly attributable to an increase in state franchise tax expense. Compensation and benefits expenses related to Corporate & Other for the nine months ended March 31, 2026 increased $0.1 million as compared to the corresponding prior year period due to an increase in stock based compensation expense due to increase in stock price compared to the prior year period. Corporate & Other Expenses - Other Income and Expenses For the three months ended March 31, 2026, net realized and unrealized loss increased $7.4 million compared to the corresponding prior year period primarily driven by notable unrealized losses being recognized on our three special purpose vehicles in the current year period, along with a significant reduction in stock price for another of our investments during the current year period. For the three months ended March 31, 2026, dividend income decreased $0.2 million as compared to the corresponding prior year period, primarily driven by a decrease in the dividend rate per share held in the current period compared to the dividend rate per share held in the prior year period. For the three months ended March 31, 2026, interest income decreased $0.1 million as compared to the corresponding prior year period, as interest income was earned in the prior year on a loan which was fully paid down in the current year. For the nine months ended March 31, 2026, net realized and unrealized gains decreased $27.9 million to a net realized and unrealized loss as compared to the corresponding prior year period due to notable unrealized losses being recognized on our three special purpose vehicles in the current year period, as opposed to unrealized gains on these special purpose vehicles in the prior year period, along with a significant reduction in stock price for another one of our investments during the current year period, as opposed to an increase in stock price for this investment in the prior year period. Further, a notable unrealized loss was recognized on one of our investments in a private fund in the current year period as opposed to an unrealized gain on this investment in the prior year period. For the nine months ended March 31, 2026, interest income decreased $0.5 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 nine months ended March 31, 2026, dividend income decreased $0.4 million as compared to the corresponding prior year period, primarily driven by a decrease in the dividend rate per share held on one of our investments in the current period compared to the dividend rate per share held on one of our investments in the prior year period. 33 Liquidity and Capital Resources Cash Flows Net cash from operating activities increased $18.9 million, from net cash used of $11.2 million for the nine months ended March 31, 2025 to net cash provided of $7.8 million for the nine months ended March 31, 2026, 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 $12.8 million, from net cash used of $0.8 million for the nine months ended March 31, 2025 to net cash provided of $12.0 million for the nine months ended March 31, 2026, driven by settlement of related party loan receivable and net sales of investments for the nine months ended March 31, 2026. Net cash from financing activities increased $1.4 million, from net cash used of $6.2 million for the nine months ended March 31, 2025 to net cash used of $4.8 million for the nine months ended March 31, 2026, driven by distributions and redemptions of non-controlling interests in Consolidated Funds during the nine months ended March 31, 2026. These were partially offset by proceeds from issuance of common stock during the nine months ended March 31, 2026. Financial Condition As of March 31, 2026, we had an unrestricted cash balance of $45.5 million, as compared to an unrestricted cash balance of $30.6 million as of June 30, 2025. We also held 1,356,125 shares of GECC common stock with an estimated fair value of $6.8 million as of March 31, 2026, 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 March 31, 2026, 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 March 31, 2026, the Company had $35.9 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 nine months ended March 31, 2026 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. 34 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.