10-Q: Great Elm Group Reports Q2 Loss Amid Investment Declines

Great Elm Group, Inc. reported a significant net loss for the second quarter and first half of fiscal 2026, primarily driven by unrealized investment losses, despite increased cash and strategic real estate activities.

Summary

• Great Elm Group, Inc. (GEG) reported a net loss of $16.5 million for the three months ended December 31, 2025, a significant decline from a net income of $1.4 million in the prior year period.
• For the six months ended December 31, 2025, GEG posted a net loss of $24.5 million, compared to a net income of $4.3 million in the same period last year.
• The net loss was primarily driven by a $13.8 million decrease in net realized and unrealized gains (shifting to a loss) for the three months, and a $20.4 million decrease for the six months, mainly due to unrealized losses on private fund investments and a reduction in stock price for another investment.
• Total revenues for the three months decreased by $0.5 million (-14%) to $3.0 million, largely due to a reduction in Incentive Fees.
• Total revenues for the six months increased significantly by $6.3 million (+84%) to $13.8 million, primarily due to a $7.0 million real estate property sale in September 2025.
• Operating costs and expenses increased, with compensation and benefits rising by $1.5 million (+44%) for the three months and $3.2 million (+45%) for the six months, mainly due to increased personnel from the Greenfield acquisition.
• Selling, general and administrative expenses also increased by $0.7 million (+51%) for the three months and $1.3 million (+47%) for the six months, also attributed to the Greenfield acquisition.
• Basic earnings per share (EPS) for the three months ended December 31, 2025, was a loss of $0.50, down from a gain of $0.04 in the prior year.
• Basic EPS for the six months ended December 31, 2025, was a loss of $0.75, down from a gain of $0.13 in the prior year.
• Cash and cash equivalents increased to $51.2 million as of December 31, 2025, from $30.6 million as of June 30, 2025.
• Net cash provided by operating activities improved to $1.9 million for the six months, compared to net cash used of $9.8 million in the prior year period, driven by the real estate sale.
• Net cash provided by financing activities improved to $6.8 million for the six months, from net cash used of $5.5 million in the prior year, due to common stock issuance proceeds and lower stock repurchases.
• The company's net consolidated debt to equity ratio was 0.2:1.0 as of December 31, 2025, well below the covenant limit of 2:1 for its GEGGL Notes.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a negative report due to the significant net losses driven by investment underperformance, despite some positive cash flow trends and strategic initiatives. The decline in equity and EPS is a major concern.

Positives

• Cash and cash equivalents significantly increased to $51.2 million as of December 31, 2025, from $30.6 million at June 30, 2025, indicating improved liquidity.
• Net cash flows from operating activities turned positive, providing $1.9 million for the six months ended December 31, 2025, a substantial improvement from a net cash outflow of $9.8 million in the prior year.
• Net cash flows from investing activities increased to $11.9 million for the six months, up from $9.9 million in the prior year, driven by the settlement of a related party loan receivable and net sales of investments.
• Net cash flows from financing activities improved significantly, providing $6.8 million for the six months, compared to a net cash outflow of $5.5 million in the prior year, due to proceeds from common stock issuance and lower stock repurchases.
• The Real Estate segment's revenues for the six months ended December 31, 2025, increased by $7.7 million, primarily due to a $7.0 million property sale in September 2025.
• The company's net consolidated debt to equity ratio of 0.2:1.0 is well below the 2:1 covenant limit for its 7.25% Notes due 2027, indicating strong balance sheet health relative to debt covenants.
• The company successfully raised capital through the issuance of common stock, totaling $2.9 million to KLIM affiliates and $9.0 million to Woodstead Value Fund LP.

Negatives

• The company reported a substantial net loss of $16.5 million for the three months ended December 31, 2025, a significant reversal from a net income of $1.4 million in the prior year.
• A net loss of $24.5 million was recorded for the six months ended December 31, 2025, compared to a net income of $4.3 million in the prior year period.
• Net realized and unrealized gains decreased by $13.8 million for the three months and $20.4 million for the six months, shifting to a net loss, primarily due to an unrealized loss on a private fund investment and a reduction in stock price for another investment.
• Operating expenses, including compensation and benefits, and selling, general and administrative expenses, increased significantly due to the Greenfield acquisition, contributing to the overall operating loss.
• Revenues for the three months ended December 31, 2025, decreased by $0.5 million (-14%) compared to the prior year, mainly due to a reduction in Incentive Fee revenue.
• Total stockholders' equity decreased to $59.7 million as of December 31, 2025, from $80.7 million as of June 30, 2025, reflecting the net losses.

Risks

• The ability of Great Elm Capital Management, LLC (GECM) to profitably manage Great Elm Capital Corp. (GECC) and the ability of Monomoy CRE, LLC (MCRE) to manage Monomoy UpREIT, LLC (Monomoy UpREIT).
• The dividend rate that GECC and Monomoy UpREIT will pay.
• The results of investment management activities, which can be volatile and subject to market fluctuations.
• The ability to sell real estate properties developed at a profit.
• The ability to raise capital to fund the business plan.
• The ability to make acquisitions and manage any acquired businesses effectively.
• Conditions in the equity and debt capital markets, as well as the economy generally, including market uncertainty regarding global trade policies, interest rates, and inflationary pressures.
• The ability to maintain the security of electronic and other confidential information.
• Serious disruptions and catastrophic events, including public health emergencies, impacting the global economy.
• Competition from larger, well-financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds.
• Outcomes of litigation and proceedings and the availability of insurance, indemnification, and other third-party coverage for losses.
• Maintaining contractual arrangements and relationships with third parties.
• The ability to attract, assimilate, develop, and retain key personnel.
• Compliance with laws, regulations, and orders.
• Changes in laws and regulations governing operations.

Future Outlook

The company continues to explore other investment management opportunities and areas providing attractive risk-adjusted returns. It also monitors and reviews its segment reporting structure to align with its various investment strategies. No specific quantitative guidance for future periods was provided in this filing.

Management Comments

• Management believes the company has sufficient liquidity available to meet its short-term and long-term obligations.
• The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2025, and there were no material changes in internal control over financial reporting.

Industry Context

StockSavvy.ai notes that the alternative asset management sector, particularly those with diversified portfolios including credit and real estate, can be susceptible to market volatility impacting investment valuations. The significant unrealized losses on private fund investments reported by Great Elm Group highlight this sensitivity. The strategic realignment into Alternative Credit and Real Estate segments, along with the acquisition of Greenfield CRE, suggests a focus on enhancing core capabilities and capturing growth in specific niches like Industrial Outdoor Storage (IOS). However, the increased operating expenses associated with these expansions, coupled with the investment losses, indicate a challenging period for profitability, a common theme for firms navigating fluctuating asset values and integration costs.

Comparison to Industry Standards

• The significant unrealized losses on private fund investments contrast with a generally more stable or positive performance seen in some diversified alternative asset managers during similar periods, depending on their specific asset allocations and hedging strategies.
• The increase in Real Estate segment revenue for the six months, driven by a $7.0 million property sale, aligns with a robust market for industrial real estate, particularly the IOS sector, which has seen strong demand and valuation growth compared to other commercial real estate segments.
• The company's net consolidated debt to equity ratio of 0.2:1.0 is considerably lower than the 2:1 covenant limit, suggesting a conservative leverage profile compared to many highly leveraged private equity or real estate development firms, which often operate closer to their debt capacity.

Corporate Governance

Legal Proceedings

• No changes required to be disclosed regarding legal proceedings.

Related Party Transactions

• The company owns 1,356,125 shares of GECC (approximately 9.7% of outstanding shares), with certain officers and directors of GECC also serving as officers and directors of GEG.
• Investments in Great Elm Strategic Partnership I, LLC (GESP), Prosper Peak Holdings, LLC (PPH), and Summit Grove Partners, LLC (SGP) are accounted for using the fair value option, with GEG holding a 25% interest in each.
• GECM has shared personnel and reimbursement agreements with Imperial Capital Asset Management, LLC (ICAM), where GEG's CEO and Chairman, Jason W. Reese, is also CEO of ICAM, and Matt Kaplan, President of GECM, is a Managing Director of ICAM.
• As of December 31, 2025, $17.4 million of the Convertible Notes were held by related parties.
• Funds managed by ICAM owned approximately $8.5 million aggregate principal amount of Convertible Notes, convertible into 2,460,115 shares, with an agreement not to convert prior to November 2026.
• Mr. Drapkin and funds managed by Northern Right Capital Management, L.P. owned approximately $8.0 million aggregate principal amount of Convertible Notes, convertible into 2,306,367 shares, with an agreement not to convert prior to July 2026.
• The Monomoy Note, a promissory note to Monomoy REIT for up to $10.0 million, was fully paid down in July 2025, with $0.1 million of interest income recognized for the six months ended December 31, 2025.
• Purchases from vendors that are related parties totaled $0.1 million for the three months and $0.8 million for the six months ended December 31, 2025.

Stakeholder Impact

• **Shareholders:** Experienced a significant net loss and negative EPS, leading to a decrease in total stockholders' equity. However, the company's stock repurchase program and recent capital raises indicate efforts to manage shareholder value and liquidity.
• **Employees:** Increased compensation and benefits expenses, particularly in the Real Estate segment due to the Greenfield acquisition, suggest growth in personnel and potential benefits for employees in those areas.
• **Customers (Managed Funds):** The performance of managed funds, particularly the unrealized losses on private fund investments, directly impacts the returns for investors in those funds.
• **Creditors:** The company maintains a strong net consolidated debt to equity ratio (0.2:1.0) well within covenant limits, which is favorable for creditors of the GEGGL Notes and Convertible Notes, indicating a lower risk of default on these obligations.
• **Suppliers/Partners:** The Greenfield acquisition and increased activity in the Real Estate segment, including purchases from related party vendors, suggest ongoing business for suppliers and partners in the construction and real estate development sectors.

Next Steps

• Continue to explore other investment management opportunities and areas that provide attractive risk-adjusted returns on invested capital.
• Monitor and review segment reporting structure in accordance with authoritative guidance.
• Manage the GEGGL Notes, which are callable on or after June 30, 2024, and mature on June 30, 2027.
• Manage the Convertible Notes, which mature on February 26, 2030, and are convertible at the option of holders, subject to terms.

Key Dates

Recommendation

The company reported substantial net losses driven by significant unrealized investment losses, which is a negative indicator. However, the company demonstrated improved cash flow from operations and financing, successfully executed capital raises, and is actively managing its capital structure through stock repurchases. The Real Estate segment shows growth in six-month revenue due to a property sale, and the company's debt-to-equity ratio is healthy. Given the mixed signals—poor investment performance offset by strong liquidity management and strategic segment growth—a 'hold' recommendation is appropriate. Investors should monitor future investment performance and the integration of recent acquisitions.

Keywords

Alternative Asset Management, Real Estate, Industrial Outdoor Storage, Credit Investments, SEC Filing, 10-Q, Financial Results, Investment Management, GECC, Monomoy UpREIT, Convertible Notes, Stock Repurchase, Capital Raise, Greenfield Acquisition