Great Elm Group, Inc.

Previous wording

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 September 30, 2024 was approximately $781.6 million.

Current wording

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.

Previous wording

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 three months ended September 30, 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.

Current wording

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.

Previous wording

Revenues for the three months ended September 30, 2024 increased $0.7 million as compared to the three months ended September 30, 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 September 30, 2024 compared to the prior year period due to increased assets under management at GECC, offset by a $0.4 million reduction in Incentive Fees.

Current wording

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.

Previous wording

Other income (expense), net includes dividend and interest income and net realized and unrealized gains and losses. For the three months ended September 30, 2024, dividend and interest income was $1.6 million, as compared to $2.0 million for the three months ended September 30, 2023. The $0.4 million decrease in interest income in the current period compared to prior year is due to a reduction in investment in Treasury bills. 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 September 30, 2024, realized and unrealized gain increased by $0.5 million from the same prior year period. This increase was primarily due to $3.5 million of unrealized gains recorded in the current period on GESP and PPH due to the valuation technique change for these entities. These were offset by a significant GECC share price increase in the prior year period, which did not occur in the current corresponding period.

Current wording

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.

Previous wording

Cash used in operating activities of our continuing operations for the three months ended September 30, 2024 were $5.8 million. The adjustments to reconcile our net income from continuing operations of $3.0 million to net cash used in operating activities included add-backs for various non-cash charges, such as $0.7 million of stock-based compensation expense, $0.5 million of non-cash interest and amortization of capitalized issuance costs, $0.6 million realized gain on investments and $0.3 million of depreciation and amortization, which was offset by a deduction of $4.4 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $7.2 million, including the impact of changes related to consolidated funds.

Current wording

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.

Previous wording

Cash flows used in operating activities of our continuing operations for the three months ended September 30, 2023 were $6.1 million. The adjustments to reconcile our net income from continuing operations of $2.8 million to net cash used in operating activities included add-backs for various non-cash charges, such as $0.7 million of stock-based compensation expense, $0.6 million of non-cash interest and amortization of capitalized issuance costs, $0.3 million of depreciation and amortization, and $0.1 million of realized loss on our investments, which was offset by deduction of $3.4 million of unrealized gain on our investments, and the net negative change in our operating assets and liabilities of $7.0 million.

Current wording

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.

Previous wording

Cash provided by investing activities of our continuing operations for the three months ended September 30, 2024 were $2.5 million, which includes purchases of investments in held-to-maturity securities of $7.4 million and proceeds from settlement of held-to-maturity investments of $10.0 million.

Current wording

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.

Previous wording

Cash flows used in investing activities of our continuing operations for the three months ended September 30, 2023 were $12.6 million which is attributed to purchases on investments of $14.3 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 three months ended September 30, 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.

Current wording

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.

Previous wording

Cash used in financing activities of our continuing operations for the three months ended September 30, 2024 were $2.2 million primarily due to stock repurchases.

Current wording

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.

Previous wording

As of September 30, 2024, we had an unrestricted cash balance of $44.2 million and $7.5 million in marketable securities. We also held 1,440,722 shares of GECC common stock with an estimated fair value of $14.7 million as of September 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.

Current wording

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.

Previous wording

As of September 30, 2024, the Company had $35.5 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.

Current wording

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.