Overview



GEG is a publicly-traded alternative asset management company focused on growing
a scalable and diversified portfolio of long-duration, permanent capital
vehicles across corporate credit, specialty finance, real estate and other asset
classes. GEG and its subsidiaries currently manage Great Elm Capital Corp.
(GECC), a publicly-traded business development company, and Monomoy Properties
UpREIT, LLC (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, 2023 was approximately $630.7 million. The total
level of our assets under management could be adversely affected by conditions
outside of our control, including a decline in the market value of our assets
under management, due to declines or heightened volatility in the capital
markets, fluctuations in interest rates, the current inflationary environment,
and other market factors, as well as financial crises, political or diplomatic
developments in the U.S. or globally, including rising trade tensions between
the U.S. and China, pandemics or other public health crises, such as a potential
resurgence of COVID-19 or another similar highly infectious or contagious
disease, trade wars, social or civil unrest, insurrection, war, including the
ongoing conflict between Russia and Ukraine which has significantly impacted the
global economy and financial markets, terrorism, natural disasters, or risks
associated with global climate change.

We continue to explore other investment management opportunities, as well as
opportunities in other areas that we believe provide attractive risk-adjusted
returns on invested capital. As of the date of this report, we have not entered
into any binding commitments to make additional acquisitions or investments in
any of these areas.

On December 30, 2022, GEG and its wholly-owned subsidiary, Great Elm FM
Acquisition, Inc. (FM Acquisition), entered into a stock purchase agreement (the
Stock Purchase Agreement) with J.P. Morgan Broker-Dealer Holdings Inc. (JPM) to
sell 61 shares of the common stock, $0.001 par value per share, of Forest
Investments, Inc. (Forest) owned by FM Acquisition and GEG, which constitute 61%
of the issued and outstanding shares of Forest's common stock, to JPM for
approximately $18.4 million in cash (the Sale of Controlling Interest in
Forest).

In connection with the Stock Purchase Agreement, GEG, JPM and Forest entered
into an amended and restated stockholders' agreement (the Stockholders
Agreement). Pursuant to the Stockholders Agreement, from January 17, 2023 until
February 17, 2023, GEG had the right (the Put Option) to sell its remaining 19%
interest in Forest (Investment in Forest) for its then fair market value. On
January 17, 2023, the Company exercised the Put Option and sold the Investment
in Forest for approximately $26.5 million in cash.

On January 3, 2023, GEG's wholly-owned subsidiary, Great Elm DME Holdings, Inc.,
along with the minority owners of Great Elm Healthcare, LLC (HC LLC), entered
into a purchase agreement with QHM Holdings, Inc., a subsidiary of Quipt Home
Medical Corp (Quipt), to sell 100% of the outstanding membership interests in HC
LLC to Quipt (the Sale of HC LLC) for $80.0 million, consisting of approximately
$72.8 million in cash, $5.2 million of indebtedness assumed by Quipt and $2.0
million in shares of Quipt common stock based on the 20-day volume-weighted
average price of Quipt's common stock for the period ending on and including the
second business day prior to the closing of the transaction. After transaction
costs of $2.5 million, distributions to non-controlling interests of $5.9
million, and indemnity escrow payment of $0.4 million, cash proceeds to GEG and
subsidiaries were $64.1 million. The disposal group satisfied the criteria for
presentation as held for sale and discontinued operations through the date of
sale, and as such our historical segment information was recast to reflect our
ongoing business as a single reportable segment and to remove the activity of
discontinued operations.

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In January 2023, Monomoy BTS Corporation (MBTS) completed purchases of certain
land parcels located in Canton, Mississippi, and Midway, 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 first 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, 2023, the
Company capitalized costs of $1.7 million within real estate under development
(current) on its balance sheet, representing the cost of land and development
and construction costs directly identifiable with the two real estate projects.

As of June 30, 2022, we had $821 million of net operating loss (NOL) and capital
loss carryforwards for federal income tax purposes. Following the Sale of
Controlling Interest in Forest, GEG retained approximately $154 million of these
carryforwards, $131 million of which expire on June 30, 2023.

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, 2023
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, 2022 as it relates to recurring transactions.

Previously reported assets and liabilities related to our Durable Medical
Equipment (DME) Business, primarily consisting of HC LLC and its subsidiaries,
have been reclassified as assets and liabilities held for sale on the Company's
consolidated balance sheet as of June 30, 2022. In addition, the historical
results of the DME Business 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 2022 as discontinued operations.
See Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations to
the accompanying unaudited condensed consolidated financial statements.
Following presentation of our DME Business as discontinued operations, the
Company views its operations and manages its business as one operating segment
focused on growing a scalable and diversified portfolio of long-duration,
permanent capital vehicles across corporate credit, specialty finance, real
estate and other asset classes.

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,


                                             Percent                                 Percent
(in thousands)                 2023          Change      2022           2023         Change      2022
Revenue:                    $    1,898         92%     $     988     $     5,637       88%     $   2,992
Operating costs and
expenses:
Non-cash compensation             (660 )       14%          (578 )        (2,246 )    (13)%       (2,572 )
Transaction costs                    -       (100)%          (92 )          (425 )    (21)%         (535 )
Other selling, general
and administrative              (3,826 )       50%        (2,546 )        (9,709 )     52%        (6,400 )
Depreciation and
amortization                      (281 )       NM            (89 )          (870 )    183%          (307 )
Total operating costs and
expenses                        (4,767 )                  (3,305 )       (13,250 )                (9,814 )
Operating loss                  (2,869 )                  (2,317 )        (7,613 )                (6,822 )
Other income (expense):
Interest expense                (1,095 )      (15)%       (1,286 )        (5,024 )     30%        (3,872 )
Other income (expense)           3,509         NM         (2,862 )        32,374       NM         (3,395 )
Total other income
(expense), net                   2,414                    (4,148 )        27,350                  (7,267 )
(Loss) income before
income taxes from
continuing operations       $     (455 )               $  (6,465 )   $    19,737               $ (14,089 )




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Revenue



Revenues for the three and nine months ended March 31, 2023 increased $0.9
million and $2.6 million, respectively, as compared to the corresponding periods
in the prior year. The increase is primarily attributable to the Monomoy UpREIT
management agreement acquired in May 2022.

Operating Costs and Expenses



Operating costs and expenses for the three and nine months ended March 31, 2023
increased $1.5 million and $3.4 million, respectively, as compared to the
corresponding periods in the prior year. This increase was mainly attributable
to costs associated with servicing the recently acquired Monomoy UpREIT
management agreement.

Other Expenses and Income



Interest expense for the three months ended March 31, 2023 decreased by $0.2
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 to JPM on December 29, 2020 (the Forest Preferred Stock) after the Sale
of Controlling Interest in Forest on December 30, 2022, which was partially
offset by interest expense on the 7.25% notes due in 2027 issued in June 2022
(the GEGGL Notes) and on the $6.3 million promissory note issued to Imperial
Capital Asset Management, LLC in May 2022 (the Seller Note) (fully repaid in
February 2023). Interest expense for the nine months ended March 31, 2023
increased by $1.2 million, primarily due to interest on the GEGGL Notes and
Seller Note, which was partially offset by decrease in interest expense on the
Forest Preferred Stock following the Sale of Controlling Interest in Forest on
December 30, 2022.

During the three months ended March 31, 2023, the Company recognized $3.5
million of other income (net), comprised of net realized and unrealized gain on
investments of $2.0 million and dividends and interest income of $1.5 million.
During the nine months ended March 31, 2023, the Company recognized $32.4
million of other income (net), comprised of gain on Sale of Controlling Interest
in Forest of $10.5 million, unrealized gain on the Investment in Forest of $24.4
million recognized in December 2022, and dividends and interest income of $4.4
million, partially offset by net realized and unrealized loss on investments
(excluding the Investment in Forest) of $6.9 million. During the three and nine
months ended March 31, 2022, the Company recognized $2.9 million and $3.4
million of other expense (net), respectively, mainly attributed to net realized
and unrealized loss on investments of $3.2 million and $5.1 million,
respectively, and net realized and unrealized loss on investments of our
consolidated fund, Great Elm SPAC Opportunity Fund, LLC (GESOF), of $0.3 million
in both periods, partially offset by dividends and interest income of $0.6
million and $1.9 million, respectively.

Income Taxes



We do not expect that we will owe any federal taxes for the nine months ended
March 31, 2023. As of June 30, 2022, the Company had net operating loss (NOL)
and capital loss carryforwards for federal income tax purposes of approximately
$821 million. Following the Sale of Controlling Interest in Forest, the Forest
entity ceased being part of our consolidated tax group and NOL carryforwards
attributed to Forest generally became unavailable for the Company's use going
forward. The Company retained approximately $154 million of the federal
carryforwards available to the Company as of June 30, 2022. Of these,
approximately $139 million of federal NOL carryforwards will expire from 2023
through 2025 (including approximately $131 million that will expire on June 30,
2023). Federal NOL carryforwards generated in fiscal year 2018 or later of
approximately $7 million can be carried forward indefinitely. Capital loss
carryforwards of approximately $8 million can be carried forward through 2027.
The Company assesses NOL and capital loss carryforwards based on taxable income
on an annual basis.

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Liquidity and Capital Resources

Cash Flows



Cash flows 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 GESOF. Cash flows
provided by operating activities of our discontinued operations for the nine
months ended March 31, 2023 were $0.8 million.

Cash flows provided by operating activities of our continuing operations for the
nine months ended March 31, 2022 were $6.8 million. The net cash inflow was
primarily the result of sales of investments by GESOF of $24.5 million, and
non-cash adjustments of $2.2 million in stock-based compensation, $4.4 million
in unrealized loss on investments, $0.7 million in realized loss on investments,
$1.1 million of non-cash interest and amortization of capitalized issuance
costs, $0.3 million related to depreciation and amortization, and $0.3 million
of net realized and unrealized loss on investments of GESOF, partially offset by
our net loss from continuing operations of $14.0 million, net negative change in
our operating assets and liabilities of $0.7 million, and $11.7 million in
purchases of investments by GESOF. The cash flows provided by operating
activities of our discontinued operations for the nine months ended March 31,
2022 were $8.6 million.

Cash flows 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 flows provided by investing activities of our continuing operations for the
nine months ended March 31, 2022 were $19 thousand and cash flows used in
investing activities of our discontinued operations for the nine months ended
March 31, 2022 were $4.5 million.

Cash flows 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.

Cash flows used in financing activities of our continuing operations for the
nine months ended March 31, 2022 were $13.2 million, primarily attributed to
payments to the broker of GESOF of $12.3 million and distributions to
non-controlling interests in GESOF of $0.9 million, while cash flows provided by
financing activities of our discontinued operations for the same period were
$0.7 million.

Financial Condition

As of March 31, 2023, we had an unrestricted cash balance of $84.1 million. We
also held 1,569,787 shares of GECC common stock with an estimated fair value of
$14.1 million as of March 31, 2023.

We believe we have sufficient liquidity available to meet our short-term and long-term obligations for at least the next 12 months.


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Borrowings



As of March 31, 2023, the Company had $26.9 million in outstanding aggregate
principal of the GEGGL Notes. The GEGGL Notes are due on June 30, 2027, and
interest is paid quarterly. The GEGGL Notes include covenants that limit
additional indebtedness or the payment of dividends in the event that our net
consolidated debt to equity ratio is, or would be on a pro forma basis, greater
than 2 to 1. In addition, if our net consolidated debt to equity ratio is
greater than 2 to 1 at the end of any calendar quarter, we must retain no less
than 10% of our excess cash flow as cash and cash equivalents until such time as
our net consolidated debt to equity ratio is less than 2 to 1 at the end of a
calendar quarter.

As of March 31, 2023, the Company had $37.0 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.

Recent Developments



On May 4, 2023, Peter A. Reed resigned as GEG's Chief Executive Officer,
effective immediately following the filing of GEG's Form 10-Q for the fiscal
quarter ended March 31, 2023. Following his resignation, Mr. Reed entered into a
consulting agreement with GEG to provide transition services to the Company for
a period of twelve months. On May 4, 2023, the Board appointed Jason Reese, the
Executive Chairman of GEG's Board of Directors since 2020, as Chairman and Chief
Executive Officer of GEG, effective immediately following Mr. Reed's
resignation.

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