UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
(Nasdaq Global Select Market) |
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(Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 7, 2024, there were
Table of Contents
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Item 1. |
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Unaudited Condensed Consolidated Balance Sheets as of March 31, 2024 and June 30, 2023 |
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Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three months ended March 31, 2023, December 31, 2022 and September 30, 2022 |
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Unaudited Notes to Condensed Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 5. |
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Item 6. |
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Unless the context otherwise requires, “we,” “us,” “our,” “GEG,” the “Company” and terms of similar import refer to Great Elm Group, Inc. and/or its subsidiaries. Our corporate website address is www.greatelmgroup.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.
1
Cautionary Statement Regarding Forward-Looking Information
This report and certain information incorporated herein by reference contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward-looking statements are reasonable, these assumptions and expectations may not prove to be correct, and we may not achieve the financial results or benefits anticipated. These forward-looking statements are not guarantees of actual results. Our actual results may differ materially from those suggested in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation:
These forward-looking statements speak only as of the time of filing of this report and we do not undertake to update or revise them as more information becomes available. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Great Elm Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
Dollar amounts in thousands (except per share data)
ASSETS |
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March 31, 2024 |
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June 30, 2023 |
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Current assets |
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Cash and cash equivalents |
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$ |
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Receivables from managed funds |
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Investments in marketable securities |
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Investments, at fair value (cost $ |
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Prepaid and other current assets |
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Real estate under development |
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Assets of Consolidated Funds: |
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Cash and cash equivalents |
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- |
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Investments, at fair value (cost $ |
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- |
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Other assets |
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- |
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Total current assets |
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Identifiable intangible assets, net |
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Right-of-use assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
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Accrued expenses and other current liabilities |
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Payable for securities purchased |
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- |
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Current portion of related party payables |
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Current portion of lease liabilities |
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Liabilities of Consolidated Funds: |
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Payable for securities purchased |
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- |
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Accrued expenses and other liabilities |
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- |
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Total current liabilities |
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Lease liabilities, net of current portion |
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Long-term debt (face value $ |
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Related party payables, net of current portion |
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- |
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Convertible notes (face value $ |
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Other liabilities |
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Total liabilities |
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Stockholders' equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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( |
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Total Great Elm Group, Inc. stockholders' equity |
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Non-controlling interests |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Great Elm Group, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Amounts in thousands (except per share data)
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For the three months ended March 31, |
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For the nine months ended March 31, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues |
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$ |
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$ |
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$ |
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$ |
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Operating costs and expenses: |
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Investment management expenses |
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Depreciation and amortization |
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Selling, general and administrative |
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Expenses of Consolidated Funds |
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- |
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Total operating costs and expenses |
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Operating loss |
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Dividends and interest income |
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Net realized and unrealized gain (loss) on investments |
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Net realized and unrealized gain (loss) on investments of Consolidated Funds |
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- |
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Interest and other income of Consolidated Funds |
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- |
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Gain on sale of controlling interest in subsidiary |
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- |
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- |
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- |
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Interest expense |
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( |
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(Loss) income before income taxes from continuing operations |
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( |
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Income tax benefit (expense) |
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- |
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- |
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- |
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Net (loss) income from continuing operations |
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( |
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Discontinued operations: |
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Net income from discontinued operations |
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- |
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Net (loss) income |
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$ |
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$ |
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$ |
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$ |
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Less: net income (loss) attributable to non-controlling interest, continuing operations |
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- |
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( |
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Less: net income attributable to non-controlling interest, discontinued operations |
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- |
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- |
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- |
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Net (loss) income attributable to Great Elm Group, Inc. |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Basic net income (loss) per share from: |
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Continuing operations |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Discontinued operations |
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- |
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- |
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Basic net income (loss) per share |
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$ |
( |
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$ |
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$ |
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$ |
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Diluted net income (loss) per share from: |
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Continuing operations |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Discontinued operations |
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- |
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- |
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Diluted net income (loss) per share |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Weighted average shares outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Great Elm Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Amounts in thousands
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Common Stock |
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Additional |
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Accumulated |
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Total Great Elm Group, Inc. Stockholders' |
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Non- |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Interest |
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Equity |
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BALANCE, June 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
- |
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$ |
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Net income |
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- |
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- |
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- |
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- |
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Issuance of common stock related to vesting of restricted stock |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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BALANCE, September 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
- |
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$ |
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Net income (loss) |
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- |
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- |
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- |
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( |
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( |
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( |
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Issuance of common stock related to vesting of restricted stock |
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- |
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- |
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- |
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- |
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- |
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- |
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Issuance of interests in Consolidated Funds |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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BALANCE, December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income (loss) |
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- |
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- |
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- |
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( |
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( |
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( |
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Issuance of common stock related to vesting of restricted stock |
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- |
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- |
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- |
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- |
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- |
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- |
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Issuance of interests in Consolidated Funds |
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- |
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- |
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- |
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- |
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- |
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Distributions from Consolidated Funds |
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- |
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- |
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- |
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- |
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- |
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( |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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BALANCE, March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Great Elm Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)
Amounts in thousands
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Common Stock |
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Additional |
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Accumulated |
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Total Great Elm Group, Inc. Stockholders' |
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Non- |
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Total Stockholders' |
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Contingently Redeemable Non-controlling |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Interest |
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Equity |
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Interest |
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BALANCE, June 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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$ |
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Net (loss) income |
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- |
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- |
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- |
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( |
) |
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( |
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( |
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( |
) |
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Distributions to non-controlling interests in Consolidated Funds |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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- |
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Issuance of common stock related to vesting of restricted stock |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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BALANCE, September 30, 2022 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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- |
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Redemption of non-controlling interests upon sale of controlling interest in subsidiary |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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- |
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Issuance of common stock related to vesting of restricted stock |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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BALANCE, December 31, 2022 |
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$ |
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$ |
|
|
$ |
( |
) |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||||
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||
Redemption of non-controlling interests upon sale of controlling interest in subsidiary |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Issuance of common stock related to vesting of restricted stock |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||
BALANCE, March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Great Elm Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Dollar amounts in thousands
|
|
For the nine months ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income from continuing operations |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Unrealized gain on investments |
|
|
( |
) |
|
|
( |
) |
Realized loss on investments |
|
|
|
|
|
( |
) |
|
Gain on sale of controlling interest in subsidiary |
|
|
- |
|
|
|
( |
) |
Non-cash interest and amortization of capitalized issuance costs |
|
|
|
|
|
|
||
Deferred tax expense |
|
|
- |
|
|
|
|
|
Change in fair value of contingent consideration |
|
|
( |
) |
|
|
|
|
Other non-cash (income) expense, net |
|
|
( |
) |
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities of Consolidated Funds: |
|
|
|
|
|
|
||
Purchases of investments |
|
|
( |
) |
|
|
- |
|
Sales of investments |
|
|
|
|
|
|
||
Amortization |
|
|
( |
) |
|
|
- |
|
Net realized and unrealized (gains) losses on investments |
|
|
( |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Receivables from managed funds |
|
|
( |
) |
|
|
( |
) |
Prepaid and other assets |
|
|
( |
) |
|
|
|
|
Real estate under development |
|
|
( |
) |
|
|
( |
) |
Operating leases |
|
|
( |
) |
|
|
( |
) |
Related party payables |
|
|
( |
) |
|
|
- |
|
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
( |
) |
|
Changes in operating assets and liabilities of Consolidated Funds: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
( |
) |
|
|
- |
|
Other assets |
|
|
( |
) |
|
|
|
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
||
Net cash used in operating activities - continuing operations |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities - discontinued operations |
|
|
- |
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of investments in held-to-maturity securities |
|
|
( |
) |
|
|
- |
|
Proceeds from settlement of held-to-maturity securities |
|
|
|
|
|
- |
|
|
Purchases of investments |
|
|
( |
) |
|
|
( |
) |
Sales of investments |
|
|
|
|
|
|
||
Proceeds from sale of controlling interest in subsidiary, net of cash sold |
|
|
- |
|
|
|
|
|
Other |
|
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by investing activities - continuing operations |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities - discontinued operations |
|
|
( |
) |
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Great Elm Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Dollar amounts in thousands
|
|
For the nine months ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
||
Principal payments on long term debt |
|
|
- |
|
|
|
( |
) |
Contributions of non-controlling interests in Consolidated Funds |
|
|
|
|
|
- |
|
|
Distributions to non-controlling interests in Consolidated Funds |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities - continuing operations |
|
|
|
|
|
( |
) |
|
Net cash provided by financing activities - discontinued operations |
|
|
- |
|
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Net decrease in cash and cash equivalents, including cash and cash equivalents classified within current assets held for sale |
|
|
( |
) |
|
|
|
|
Less: net increase in cash and cash equivalents classified within current assets held for sale |
|
|
- |
|
|
|
|
|
Plus: cash received from (used in) discontinued operations |
|
|
- |
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Non-cash investing and financing activities |
|
|
|
|
|
|
||
Non-cash contribution to Consolidated Funds |
|
$ |
|
|
$ |
- |
|
|
Lease liabilities and right-of-use assets arising from operating leases |
|
|
- |
|
|
|
|
|
Partial settlement of Seller Note in exchange for GECC stock |
|
|
- |
|
|
|
|
|
Non-cash distributions received from Consolidated Funds |
|
|
- |
|
|
|
|
|
Equity consideration upon Sale of HC LLC |
|
|
- |
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Great Elm Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2024
1. Organization
Great Elm Group, Inc. (referred to as the Company or GEG) is an alternative asset management company incorporated in Delaware. The Company focuses on growing a scalable and diversified portfolio of long-duration and permanent capital vehicles across credit, real estate, specialty finance, and other alternative strategies.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Great Elm Capital Management, Inc. (GECM), Great Elm Opportunities GP, Inc. (GEO GP), Great Elm Capital GP, LLC, Great Elm FM Acquisition, Inc., Great Elm DME Holdings, Inc., Great Elm DME Manager, LLC, and Monomoy BTS Corporation (MBTS), Great Elm Investments LLC, as well as its majority-owned subsidiaries Forest Investments, Inc. (through December 30, 2022), and Great Elm Healthcare, LLC (HC LLC) and its wholly-owned subsidiaries (through January 3, 2023). In addition, we have determined that the Company was the primary beneficiary of certain variable interest entities, and therefore the operations of those entities have been included in our consolidated results for the relevant periods.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes that are normally included in the Company’s Form 10-K and should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. These financial statements reflect all adjustments (consisting of normal and recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations.
The historical results of the Durable Medical Equipment (DME) business, primarily consisting of HC LLC and its subsidiaries, sold on January 3, 2023, and related activity have been presented in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and cash flows for the nine months ended March 31, 2023 as discontinued operations. Further, the historical segment information was recast to reflect our ongoing business as a single reportable segment and to remove the activity of discontinued operations. Unless otherwise specified, disclosures in these condensed consolidated financial statements reflect continuing operations only.
Certain prior period amounts have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (US 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. On an on-going basis, the Company evaluates all of these estimates and assumptions. The most important of these estimates and assumptions relate to revenue recognition, valuation allowance for deferred tax assets, estimates associated with accounting for asset acquisitions, and fair value measurements, including stock-based compensation. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.
9
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries, majority-owned subsidiaries, and subsidiaries in which we hold a controlling financial interest. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests, including kick out rights, either directly or indirectly through related parties presumed to be under our control. We consolidate a variable interest entity (VIE) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. We deconsolidate a VIE when we no longer possess the power to direct the activities of the VIE that most significantly impact its economic performance or the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE.
All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling interests in the Company’s subsidiaries are reported as a component of equity, separate from the parent company’s equity or outside of permanent equity for non-controlling interests that are contingently redeemable. Results of operations attributable to the non-controlling interests are included in the Company’s consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase. Cash equivalents consist primarily of exchange-traded money market funds and U.S. treasury bills. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.
Investments in Marketable Securities
Investments in marketable securities consist of U.S. treasury bills with original maturity exceeding 90 days. The Company classifies investments in debt securities as either trading, held-to-maturity, or available-for-sale. Securities are classified as trading if they are purchased and held principally for the purpose of selling in the near term and as held-to-maturity when the Company has both the positive intent and ability to hold the security to maturity. Investments in debt securities not classified as either trading or held-to-maturity are classified as available-for-sale securities. Trading securities are measured at fair value with unrealized gains and losses reported within net realized and unrealized gain on investments. Held-to-maturity securities are measured at amortized cost with realized gains and losses reported within net realized and unrealized gain on investments. Available-for-sale securities are measured at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss).
As of March 31, 2024, all investments in marketable securities were classified as held-to-maturity and had original maturities (at the time of purchase) exceeding 90 days. As of March 31, 2024, the amortized cost basis for these securities approximated their fair value.
Investments, at Fair Value
Investments, at fair value, consist of equity and equity-related securities and debt securities classified as trading carried at fair value, as well as investments in private funds measured using the net asset value (NAV) as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946, Financial Services – Investment Companies, as of the valuation date. Changes in the fair value and NAV are recorded within net realized and unrealized gain on investments. Dividends received are recorded within dividends and interest income on the consolidated statements of operations.
10
Real Estate under Development
Real estate under development is classified as follows: (i) real estate under development (current), which includes real estate projects that are in the process of being developed and expected to be completed and disposed of within one year of the balance sheet date; (ii) real estate under development (non-current), which includes real estate projects that are in the process of being developed and expected to be completed and disposed of more than one year from the balance sheet date; and (iii) real estate held for sale, which includes land and completed improvements thereon that meet all of the “held for sale” criteria.
Real estate under development is carried at cost less impairment, if applicable. We capitalize costs that are directly identifiable with the specific real estate projects, including pre-acquisition and pre-construction costs, development and construction costs, taxes, and insurance. We do not capitalize any general and administrative or overhead costs, regardless of whether the costs are internal or paid to third parties. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for occupancy.
Real estate held for sale is recorded at the lower of cost or fair value less cost to sell. If an asset’s fair value less cost to sell, based on discounted future cash flows, management estimates or market comparisons, is less than its carrying amount, an allowance is recorded against the asset.
Impairment of Long-Lived Assets
Long-lived assets include real estate under development, property and equipment, definite-lived intangible assets, and lease right-of-use assets. The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable based on undiscounted cash flows. Impairment losses are recorded when undiscounted cash flows estimated to be generated by an asset are less than the asset’s carrying amount. The amount of the impairment loss, if any, is calculated as the excess of the asset’s carrying value over its fair value, which is determined using a discounted cash flow analysis, management estimates or market comparisons.
Leases
We determine if an arrangement contains a lease at the inception of a contract considering all relevant facts and circumstances, which normally does not require significant judgment. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of the lease based on the present value of the remaining future minimum lease payments. As the interest rate implicit in our leases is generally not readily determinable, we utilize the incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and are reduced by lease incentives.
The Company’s office leases typically require reimbursements to the lessor for real estate taxes, common area maintenance and other operating costs, which are expensed as incurred as variable lease costs. The Company accounts for lease and nonlease components as a single lease component.
In March 2024, the Company signed a new office lease which is expected to commence in December 2024. As none of the criteria for recognition have been met as of March 31, 2024, there is
11
Earnings per Share
The following table presents the calculation of basic and diluted net income (loss) per share:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||||||||||
(in thousands except per share amounts) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Less: net income (loss) attributable to non-controlling interest, continuing operations |
|
|
|
|
|
- |
|
|
|
|
|
|
( |
) |
||
Numerator for basic EPS - Net (loss) income from continuing operations attributable to Great Elm Group, Inc. |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income from discontinued operations |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Less: net income attributable to non-controlling interest, discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Numerator for basic EPS - Net income (loss) from discontinued operations, attributable to Great Elm Group, Inc. |
|
$ |
- |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense associated with Convertible Notes, continuing operations |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
Numerator for diluted EPS - Net (loss) income from continuing operations attributable to Great Elm Group, Inc., after the effect of dilutive securities |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Numerator for diluted EPS - Net income (loss) from discontinued operations, attributable to Great Elm Group, Inc. |
|
$ |
- |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator for basic EPS - Weighted average shares of common stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restricted stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Convertible Notes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Denominator for diluted EPS - Weighted average shares of common stock outstanding after the effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) per share from: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Discontinued operations |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Basic net income (loss) per share |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Diluted net income (loss) per share from: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Discontinued operations |
|
|
- |
|
|
|
|
|
$ |
- |
|
|
|
|
||
Diluted net income (loss) per share |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
As of March 31, 2024, the Company had
As of March 31, 2023, the Company had
12
As of March 31, 2024 and 2023, the Company had an aggregate of
Recently Adopted Accounting Standards
Current Expected Credit Losses. In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326), which changes the impairment model for financial instruments, including trade receivables from an incurred loss method to a new forward looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical experience, current information and reasonable and supportable forecasts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company
Recently Issued Accounting Standards
Income Taxes. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments in this ASU are effective for fiscal years beginning after December 15, 2025, and early adoption and retrospective application are permitted. The Company is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.
3. Revenue
The revenues from each major source are summarized in the following table:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Management fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Incentive fees |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
||
Property management fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Administration and service fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The Company recognizes investment management revenue at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customers. Investment management revenue primarily consists of fees based on a percentage of assets under management, fees based on the performance of managed assets, and administration and service fees. Fees are based on agreements with each investment product and may be terminated at any time by either party subject to the specific terms of each respective agreement.
Management Fees
The Company earns management fees based on the investment management agreements GECM has with Great Elm Capital Corp. (GECC), Monomoy Properties UpREIT, LLC (Monomoy UpREIT), the operating partnership of Monomoy Properties REIT, LLC, and other private funds managed by GECM (collectively, the Funds). The performance obligation is satisfied and management fee revenue is recognized over time as the services are rendered, since the Funds simultaneously receive and consume the benefits provided as GECM performs services. Management fee rates range from
Property Management Fees
Under the Monomoy UpREIT investment management agreement, GECM is also entitled to
13
Incentive Fees
The Company earns incentive fees based on the investment management agreements GECM has with GECC, Monomoy Properties II, LLC (MP II), a feeder fund of Monomoy Properties REIT, LLC and other private funds managed by GECM. Where an investment management agreement includes both management fees and incentive fees, the performance obligation is considered to be a single obligation for both fees. Incentive fees are variable consideration associated with the investment management agreements. Incentive fees are earned based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements. Incentive fees are typically
Administration Fees
The Company earns administration fees based on the administration agreement GECM has with GECC whereby the investment vehicles reimburse GECM for costs incurred in performing certain administrative functions. This revenue is recognized over time as the services are performed. Administration fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation for each investment vehicle that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.
The Company also earns services fees based on a shared services agreement with Imperial Capital Asset Management, LLC (ICAM). This revenue is recognized over time as the services are performed. Service fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflects agreed-upon rates for the services provided. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.
4. Related Party Transactions
Related party transactions are measured in part by the amount of consideration paid or received as established and agreed by the parties. Consideration paid for such services in each case is the negotiated value.
The following tables summarize activity and outstanding balances between the managed investment products and the Company:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net realized and unrealized gain (loss) on investments |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Net realized and unrealized gain (loss) on investments of Consolidated Funds |
|
|
|
|
|
- |
|
|
|
|
|
|
( |
) |
||
Dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(in thousands) |
|
March 31, 2024 |
|
|
June 30, 2023 |
|
||
Dividends receivable |
|
$ |
|
|
$ |
|
||
Investment management revenues receivable |
|
|
|
|
|
|
||
Receivable for reimbursable expenses paid |
|
|
|
|
|
|
||
Receivables from managed funds |
|
$ |
|
|
$ |
|
||
Investment Management
GECM has agreements to manage the investment portfolios for GECC, Monomoy UpREIT and other investment products, as well as to provide administrative services. Under these agreements, GECM receives management fees based on the managed assets (other than cash and cash equivalents) and rent collected, incentive fees based on the performance of those assets, and administration and service fees. See Note 3 - Revenue for additional discussions of the fee arrangements.
14
Consolidated Funds
Through its wholly-owned subsidiaries GECM and GEO GP, the Company serves as the investment manager, general partner, or managing member of certain private funds, in which it may also have a direct investment. For funds which are determined to be VIEs and where it is determined that the Company is the primary beneficiary, the criteria for consolidation are met. The Company monitors such funds and related criteria for consolidation on an ongoing basis. Funds that have historically been consolidated will be deconsolidated at such time as the Company is no longer deemed to be the primary beneficiary and will then be treated as equity method investments.
The Company retains the specialized investment company accounting guidance under US GAAP with respect to the Consolidated Funds. As such, investments of the Consolidated Funds are included in the consolidated balance sheets at fair value and the net realized and unrealized gain or loss on those investments was included as a component of other income on the consolidated statements of operations. Non-controlling interests of the Consolidated Funds are included in net income (loss) attributable to non-controlling interest, continuing operations. The creditors of Consolidated Funds do not have recourse to the Company other than to the assets of the respective Consolidated Funds.
The Company holds investments in certain funds that are VIEs but the Company is not deemed to be the primary beneficiary. Such investments are treated as equity method investments and the Company has elected the fair value option using NAV as a practical expedient with all changes in fair value reported in net realized and unrealized gain (loss) on investments on the consolidated statements of operations.
See Note 2 - Summary of Significant Accounting Policies for additional details.
Investments
As of March 31, 2024, the Company owns
The Company receives dividends from its investments in GECC and Monomoy UpREIT and earns unrealized gains and losses based on the mark-to-market performance of those investments. See Note 5 - Fair Value Measurements.
In February 2024, the Company invested in $
Other Transactions
GECM has shared personnel and reimbursement agreements with ICAM. Jason W. Reese, the Chief Executive Officer and Chairman of the Company’s Board of Directors, is the Chief Executive Officer of ICAM, and Matt Kaplan, the President of GECM, is also a Managing Director of ICAM. Certain costs incurred under these agreements relate to human resources, investment management, and other administrative services provided by ICAM employees, for the benefit of the Company and its subsidiaries, and are included in investment management expenses in the consolidated statements of operations. For the three and nine months ended March 31, 2024, such costs were $
As of January 1, 2024, GECM also has a shared personnel and reimbursement agreement with ICAM whereby ICAM reimburses certain costs incurred by GECM related to administrative services provided by GECM employees for the benefit of ICAM. See Note 3 - Revenue for additional details.
15
On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC. The agreement included a retainer fee of $
See Note 5 - Fair Value Measurements for details on the contingent consideration payable to ICAM following the acquisition of the Monomoy UpREIT investment management agreement and Note 8 - Convertible Notes for details on the Convertible Notes issued to related parties.
5. Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
US GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
The assets and liabilities measured at fair value on a recurring and
|
|
Fair Value as of March 31, 2024 |
|
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total assets within the fair value hierarchy |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Investments valued at net asset value |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Total assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liability |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
16
|
|
Fair Value as of June 30, 2023 |
|
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total assets within the fair value hierarchy |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Investments valued at net asset value |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Total assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liability |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
There were
The following is a reconciliation of changes in Level 3 assets:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Beginning balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Payments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Ending balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following is a reconciliation of changes in Level 3 liabilities:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Beginning balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Payments |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Ending balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The assets of the Consolidated Funds measured at fair value on a recurring basis are summarized in the table below:
|
|
Fair Value as of March 31, 2024 |
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets of Consolidated Funds: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets within the fair value hierarchy |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
There were
17
transparency during the three and nine months ended March 31, 2024. The net change in unrealized appreciation relating to Level 3 assets still held as of March 31, 2024 totaled $
The following is a reconciliation of changes in fair value of Level 3 assets of Consolidated Funds:
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
||
(in thousands) |
|
2024 |
|
|
2024 |
|
||
|
|
|
|
|
|
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Purchases |
|
|
|
|
|
|
||
Sales and Paydowns |
|
|
( |
) |
|
|
( |
) |
Net Accretion |
|
|
|
|
|
|
||
Transfers Out |
|
|
( |
) |
|
|
( |
) |
Change in fair value |
|
|
|
|
|
|
||
Ending balance |
|
$ |
|
|
$ |
|
||
The valuation techniques applied to investments held by the Company and by the Consolidated Funds varied depending on the nature of the investment.
Equity and equity-related securities
Securities traded on a national securities exchange are stated at the close price on the valuation date. To the extent these securities are actively traded and valuation adjustments are
Equity investments that do not have readily-available market prices utilize valuation models to determine fair value and are classified as Level 3. As of March 31, 2024, the Company had an equity investment in a private company that was valued using an options pricing model with a volatility of
Debt securities
Bank loans, corporate debt and other debt obligations traded on a national exchange are valued based on quoted market prices and classified as Level 2. Debt investments that are not actively traded are generally based on discounted cash flows and classified as Level 3. As of March 31, 2024, debt investments valued based on discounted cash flows use discount rates ranging from
Investments in private funds
The Company values investments in private funds using NAV as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of FASB ASC Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.
As of March 31, 2024 and June 30, 2023, investments in private funds primarily consisted of our investments in Monomoy UpREIT and Great Elm Opportunities Fund I, LP Series D (GEOF Series D). Monomoy UpREIT allows redemptions annually with
18
Contingent consideration
In conjunction with the acquisition of the Monomoy UpREIT investment management agreement, the Company entered into a contingent consideration agreement that requires the Company to pay up to $
See Note 7 - Long-Term Debt for additional discussion related to the fair value of our notes payable and other long-term debt. The carrying value of all other financial assets and liabilities approximate their fair values.
6. Real Estate Under Development
In January 2023, MBTS completed purchases of certain land parcels located in Mississippi and Florida. 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, which is expected not later than the second calendar quarter of 2024. We intend to sell the land and improvements with the attached leases at or close to the respective lease commencement date.
During the three and nine months ended March 31, 2024, the Company capitalized costs of $
7. Long-Term Debt
The Company’s long-term debt is summarized in the following table:
(in thousands) |
|
Borrower |
|
March 31, 2024 |
|
|
June 30, 2023 |
|
||
GEGGL Notes |
|
GEG |
|
$ |
|
|
$ |
|
||
Total principal |
|
|
|
$ |
|
|
$ |
|
||
Unamortized debt discounts and issuance costs |
|
|
|
|
( |
) |
|
|
( |
) |
Long-term debt |
|
|
|
|
|
|
|
|
||
During the three and nine months ended March 31, 2024, the Company incurred interest expense of $
19
Additional details of the Company's long-term debt are discussed below.
GEGGL Notes
On June 9, 2022, we issued $
The GEGGL Notes include covenants that limit additional indebtedness or the payment of dividends subject to compliance with a net consolidated debt to equity ratio of
8. Convertible Notes
As of March 31, 2024 and June 30, 2023, the total outstanding principal balance of convertible notes due on
The Company may, subject to compliance with the terms of the Convertible Notes, effect the conversion of some or all of the Convertible Notes into shares of common stock, subject to certain liquidity and pricing requirements, as specified in the Convertible Notes.
The embedded conversion feature in the Convertible Notes qualifies for the scope exception to derivative accounting in FASB ASC Topic 815, Derivatives and Hedging, for certain contracts involving a reporting entity’s own equity. The Company incurred $
During the three and nine months ended March 31, 2024, the Company incurred interest expense of $
20
9. Share-Based and Other Non-Cash Compensation
Restricted Stock Awards and Restricted Stock Units
The following table presents activity related to the Company’s restricted stock awards and restricted stock units for the nine months ended March 31, 2024:
Restricted Stock Awards and Restricted Stock Units |
|
Shares |
|
|
Weighted Average Grant Date Fair Value |
|
||
Outstanding at June 30, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at March 31, 2024 |
|
|
|
|
$ |
|
||
Restricted stock awards and restricted stock units have vesting terms between
Stock Options
The following table presents activity related to the Company’s stock options for the nine months ended March 31, 2024:
Stock Options |
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (years) |
|
|
Aggregate Intrinsic Value |
|
||||
Outstanding at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Options granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited, cancelled or expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding at March 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Exercisable at March 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Stock-Based Compensation Expense
Stock-based compensation expense related to all restricted stock awards, restricted stock units, and stock options totaled $
Non-Employee Director Deferred Compensation Plan
In December 2020, the Company established the Great Elm Group, Inc. Non-Employee Directors Deferred Compensation Plan allowing non-employee directors to defer their cash and/or equity compensation under a non-revocable election for each calendar year. Such compensation is deferred until the earlier of
Other Non-Cash Compensation
During the nine months ended March 31, 2024, the Company issued compensation to certain employees in the form of GECC common shares to be settled with GECC shares currently held by the Company. The total value of GECC shares awarded for the nine months ended March 31, 2024 was $
21
10. Income Taxes
As of June 30, 2023, the Company had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $
11. Commitments and Contingencies
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
22
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 business development company, and Monomoy UpREIT, an industrial-focused real estate investment trust, in addition to other investments. The combined assets under management of these entities at March 31, 2024 was approximately $688.0 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 three and nine months ended March 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, 2023 as it relates to normal and recurring transactions.
The historical results of the Durable Medical Equipment (DME) business, primarily consisting of HC LLC and its subsidiaries, sold on January 3, 2023 and related activity have been presented in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and cash flows for the nine months ended March 31, 2023 as discontinued operations. Further, the historical segment information was recast to reflect our ongoing business as a single reportable segment and to remove the activity of discontinued operations. Unless otherwise specified, disclosures in these condensed consolidated financial statements reflect continuing operations only.
23
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) |
|
2024 |
|
|
Percent Change |
|
2023 |
|
|
2024 |
|
|
Percent Change |
|
2023 |
|
||||
Revenues |
|
$ |
2,787 |
|
|
47% |
|
$ |
1,898 |
|
|
$ |
8,916 |
|
|
58% |
|
$ |
5,637 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment management expenses, excluding non-cash compensation |
|
|
(2,330 |
) |
|
0% |
|
|
(2,329 |
) |
|
|
(7,116 |
) |
|
20% |
|
|
(5,906 |
) |
Non-cash compensation |
|
|
(698 |
) |
|
6% |
|
|
(660 |
) |
|
|
(2,426 |
) |
|
8% |
|
|
(2,246 |
) |
Other selling, general and administrative |
|
|
(1,357 |
) |
|
(9)% |
|
|
(1,497 |
) |
|
|
(4,552 |
) |
|
8% |
|
|
(4,228 |
) |
Depreciation and amortization |
|
|
(271 |
) |
|
(4)% |
|
|
(281 |
) |
|
|
(837 |
) |
|
(4)% |
|
|
(870 |
) |
Total operating costs and expenses |
|
|
(4,656 |
) |
|
|
|
|
(4,767 |
) |
|
|
(14,931 |
) |
|
|
|
|
(13,250 |
) |
Operating loss |
|
|
(1,869 |
) |
|
|
|
|
(2,869 |
) |
|
|
(6,015 |
) |
|
|
|
|
(7,613 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
(1,074 |
) |
|
(2)% |
|
|
(1,095 |
) |
|
|
(3,197 |
) |
|
(36)% |
|
|
(5,024 |
) |
Other income (expense), net |
|
|
60 |
|
|
(98)% |
|
|
3,509 |
|
|
|
8,848 |
|
|
(73)% |
|
|
32,374 |
|
Total other income (expense), net |
|
|
(1,014 |
) |
|
|
|
|
2,414 |
|
|
|
5,651 |
|
|
|
|
|
27,350 |
|
(Loss) income before income taxes from continuing operations |
|
$ |
(2,883 |
) |
|
|
|
$ |
(455 |
) |
|
$ |
(364 |
) |
|
|
|
$ |
19,737 |
|
Revenue
Revenues for the three months ended March 31, 2024 increased $0.9 million as compared to the three months ended March 31, 2023 primarily due to the recognition of $0.7 million in incentive fees earned from GECC in the current quarter whereas there were no corresponding incentive fees in the prior year period under the revenue recognition criteria. Revenues for the nine months ended March 31, 2024 increased $3.3 million as compared to the nine months ended March 31, 2023 primarily due to the recognition of $2.7 million in incentive fees earned from GECC in the current year to date period whereas there were no corresponding incentive fees in the prior year period under the revenue recognition criteria. In addition, administration and service fee revenues increased by $0.3 million for the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023 as a result of changes in organizational structure including additional personnel.
Operating Costs and Expenses
Investment management expenses, excluding non-cash compensation, for the nine months ended March 31, 2024 increased $1.2 million as compared to the corresponding period in the prior year. Increases in investment management expenses, excluding non-cash compensation, were primarily attributable to compensation-related costs as the Company has shifted focus to the investment management business after the sale of the DME business in prior year. These increases are partially offset by the decreases in other selling, general and administrative costs of $0.1 million and -$0.3 million, respectively, for the three and nine months ended March 31, 2024 as compared to the corresponding periods in the prior year.
Other Income (Expense)
Interest expense for the nine months ended March 31, 2024 decreased by $1.8 million compared to the corresponding period in the prior year, as there was no interest expense related to the 35,010 shares of preferred stock issued by Forest Investments, Inc. (Forest) to J.P. Morgan Broker-Dealer Holdings Inc. after the sale of controlling interest in Forest on December 30, 2022 or the $6.3 million promissory note issued to Imperial Capital Asset Management, LLC which was fully repaid in February 2023.
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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, 2024, dividend and interest income was $2.4 million and $6.4 million, respectively, as compared to $1.5 million and $4.4 million, respectively for the three and nine months ended March 31, 2023. The increases in dividend and interest income are primarily attributable to new investments in private funds and marketable securities. 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. In addition, during the three and nine months ended March 31, 2023, the Company recognized a gain on the sale of its controlling interest in Forest in December 2022 of $10.5 million and gain on the January 2023 sale of its remaining non-controlling interest in Forest of $24.4 million.
Liquidity and Capital Resources
Cash Flows
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 income 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 operating activities of our continuing operations for the nine months ended March 31, 2023 were $3.6 million. The adjustments to reconcile our net income from continuing operations of $19.7 million to net cash used in operating activities included add-backs for various non-cash charges, such as $2.0 million of stock-based compensation expense, $1.7 million of non-cash interest and amortization of capitalized issuance costs, and $0.9 million of depreciation and amortization, which was offset by deduction of $12.8 million of unrealized gain on our investments, $4.7 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 $2.0 million. During the nine months ended March 31, 2023 we also received $1.6 million attributed to sales of investments by Great Elm SPAC Opportunity Fund, LLC (GESOF). Cash flows provided by operating activities of our discontinued operations for the nine months ended March 31, 2023 were $0.8 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 provided by investing activities of our continuing operations for the nine months ended March 31, 2023 were $41.1 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. Cash flows provided by investing activities of our discontinued operations for the nine months ended March 31, 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 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.
Cash used in financing activities of our continuing operations for the nine months ended March 31, 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 nine months ended March 31, 2023 of $5.2 million were primarily attributed to distributions to non-controlling interests upon Sale of HC LLC of $5.9 million.
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Financial Condition
As of March 31, 2024, we had an unrestricted cash balance of $44.1 million and $24.8 million in marketable securities. We also held 1,518,162 shares of GECC common stock with an estimated fair value of $16.8 million as of March 31, 2024. We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months.
Borrowings
As of March 31, 2024, the Company had $26.9 million in outstanding aggregate principal amount of 7.25% notes due on June 30, 2027 (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, 2024, the Company had $38.9 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.
Item 3. Quantitative and Qualitative 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, 2023.
Item 4. Controls and Procedures.
We evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. 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, 2024, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting for the quarter ended March 31, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
No changes required to be disclosed.
Item 1A. Risk Factors.
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, 2023. There have been no material changes from the risk factors previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In November 2023, the Company implemented a stock buyback program pursuant to Rule 10b5-1 and Rule 10b-18 under the Exchange Act (the "buyback program") authorizing us to repurchase our common stock in open market transactions in an aggregate amount of up to $3,850,000 through May 15, 2024 unless extended or terminated by our Board.
Common stock repurchases during the nine months ended March 31, 2024 were:
Month |
|
Total Number of |
|
|
Average Price Per |
|
|
Total Number of |
|
|
Maximum Number |
|
||||
December 1-31, 2023 |
|
|
1,106 |
|
|
$ |
1.80 |
|
|
|
1,106 |
|
|
$ |
3,668,009 |
|
January 1-31, 2024 |
|
|
974 |
|
|
$ |
1.80 |
|
|
|
2,080 |
|
|
$ |
3,666,256 |
|
February 1-29, 2024 |
|
|
5 |
|
|
$ |
1.80 |
|
|
|
2,085 |
|
|
$ |
3,666,247 |
|
Total |
|
|
2,085 |
|
|
$ |
1.80 |
|
|
|
2,085 |
|
|
|
|
|
Item 5. Other Information.
During the quarter ended March 31, 2024, no director or officer (as defined in Rule 16a-1(f) promulgated under the Exchange Act) of GEG
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Item 6. Exhibits.
EXHIBIT INDEX
All references are to filings by Great Elm Group, Inc. (the registrant) with the SEC under File No. 001-39832.
Exhibit
Number Description
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
31.1* |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2* |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1* |
|
|
|
|
|
101 |
|
Materials from the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in inline Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Notes to the Condensed Consolidated Financial Statements, tagged in detail (furnished herewith). |
|
|
|
104 |
|
The cover page from the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in inline XBRL (included as Exhibit 101). |
|
|
|
*Filed or furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
GREAT ELM GROUP, INC. |
|
|
Date: May 8, 2024 |
/s/ Jason W. Reese |
|
Jason W. Reese |
|
Chief Executive Officer & Chairman |
|
|
Date: May 8, 2024 |
/s/ Keri A. Davis |
|
Keri A. Davis |
|
Chief Financial Officer & Chief Accounting Officer |
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