Overview



GEG is a publicly-traded, investment 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 December 31, 2022 was approximately $619.0 million. 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 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 total consideration of $80.0 million consisted 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.
The disposal group satisfied the criteria for presentation as held for sale and
discontinued operations as of December 31, 2022, and as such we have recast our
historically reported segment information to reflect our ongoing business as a
single reportable segment and to remove the activity of discontinued operations.

On December 30, 2022, GEG and 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.

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

COVID-19



The Company has been closely monitoring, and will continue to monitor, the
impact of the COVID-19 pandemic (including new variants of COVID-19) on all
aspects of its business. Given the fluidity of the pandemic, the Company cannot
estimate the long-term impact of COVID-19 on its business, future results of
operations, financial position or cash flows at this time. However, the
operational and financial performance of the Company's business may be
significantly impacted by COVID-19. The COVID-19 pandemic and preventive
measures taken to contain or mitigate its spread have caused, and are continuing
to cause, business shutdowns, cancellations of events and restrictions on
travel, significant reductions in demand for certain goods and services,
reductions in business activity and financial transactions, supply chain
disruptions, labor difficulties and shortages, commodity inflation and elements
of economic and financial market instability in the United States and globally.
Such effects will likely continue for the duration of the pandemic, which is
uncertain, and for some period thereafter.

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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 six months ended December 31,
2022 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 six months ended December 31, 2022 and 2021 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, which is the business of investment management 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 December
                                             31,                      For

the six months ended December 31,


                                              Percent                                   Percent
(in thousands)                 2022           Change      2021           2022           Change      2021
Revenue:                    $     1,879         84%     $   1,021     $     3,739         87%     $   2,004
Operating costs and
expenses:
Non-cash compensation              (645 )      (47)%       (1,226 )        (1,586 )      (20)%       (1,994 )
Transaction costs                  (425 )       NM            (35 )          (425 )       94%          (219 )
Other selling, general
and administrative               (3,302 )       49%        (2,218 )        (5,883 )       44%        (4,078 )
Depreciation and
amortization                       (295 )      171%          (109 )          (589 )      170%          (218 )
Total operating costs and
expenses                         (4,667 )                  (3,588 )        (8,483 )                  (6,509 )
Operating loss                   (2,788 )                  (2,567 )        (4,744 )                  (4,505 )
Other income (expense):
Interest expense                 (1,955 )       51%        (1,293 )        (3,929 )       52%        (2,586 )
Other income (expense)           34,205         NM           (983 )        28,865         NM           (533 )
Total other income
(expense), net                   32,250                    (2,276 )        24,936                    (3,119 )
Income (loss) before
income taxes from
continuing operations       $    29,462                 $  (4,843 )   $    20,192                 $  (7,624 )


Revenue

Revenues for the three and six months ended December 31, 2022 increased $0.9
million and $1.7 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 six months ended December 31,
2022 increased $1.1 million and $2.0 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.

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Other Expenses and Income



Interest expense for the three and six months ended December 31, 2022 increased
by $0.7 million and $1.3 million, respectively, as compared to the corresponding
periods in the prior year, primarily due to interest 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), of which $3.7 million remains outstanding as of December 31, 2022.

During the three and six months ended December 31, 2022 the Company recognized
$34.2 million and $28.9 million of other income (net), comprised of gain on Sale
of Controlling Interest in Forest in December 2022 of $10.5 million, unrealized
gain on the investment in the remaining non-controlling (19%) interest in Forest
of $24.4 million recognized in December 2022, and dividends and interest income
of $1.4 million and $2.9 million, respectively, partially offset by net realized
and unrealized loss on investments of $22.2 million and $15.4 million,
respectively. During the three and six months ended December 31, 2021, the
Company recognized $1.0 million and $0.5 million of other expense (net),
respectively, mainly attributed to net realized and unrealized loss on
investments of $1.8 million and $1.8 million, respectively, partially offset by
dividends and interest income of $0.6 million and $1.3 million, respectively, as
well as net realized and unrealized gain on investments of our consolidated fund
Great Elm SPAC Opportunity Fund, LLC (GESOF) of $0.2 million (during the three
months ended December 31, 2021 only).

Income Taxes



We do not expect that we will owe any federal taxes for the six months ended
December 31, 2022. As of June 30, 2022, the Company had net operating loss (NOL)
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 NOL 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. The
approximately $15 million of federal NOL carryforwards generated in fiscal year
2018 or later can be carried forward indefinitely. The Company assesses NOL
carryforwards based on taxable income on an annual basis.

Liquidity and Capital Resources

Cash Flows



Cash flows used in operating activities of our continuing operations for the six
months ended December 31, 2022 were $1.6 million. The adjustments to reconcile
our net income from continuing operations of $20.2 million to net cash used in
operating activities included add-backs for various non-cash charges, such as
$19.7 million of realized loss on our investments, $1.4 million of stock-based
compensation expense, and $0.6 million of depreciation and amortization, which
was offset by deduction of $35.2 million of unrealized 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
$0.8 million. During the six months ended December 31, 2022 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 six months ended
December 31, 2022 were $2.9 million.

Cash flows used in operating activities of our continuing operations for the six
months ended December 31, 2021 were $4.9 million. The net cash outflow was
primarily the result of our net loss from continuing operations of $7.5 million,
net negative change in our operating assets and liabilities of $1.6 million, and
$0.4 million in net purchases of investments within our Consolidated Fund. These
outflows were partially offset by non-cash adjustments of $1.7 million in
stock-based compensation, $1.2 million in unrealized loss on investments, $0.7
million in realized loss on investments, and $0.2 million related to
depreciation and amortization. Cash flows provided by operating activities of
our discontinued operations for the six months ended December 31, 2021 were $8.0
million.

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Cash flows provided by investing activities of our continuing operations for the
six months ended December 31, 2022 were $14.7 million which is attributed to the
proceeds from sale of controlling interest in Forest, net of cash sold, and
contribution of $3.0 million into a portfolio fund in advance of the effective
date of the underlying subscription agreement. Cash flows used in investing
activities of our discontinued operations for the six months ended December 31,
2022 were $4.1 million.

Cash flows provided by investing activities of our continuing operations for the
six months ended December 31, 2021 were $19 thousand and cash flows used in
investing activities of our discontinued operations for the six months ended
December 31, 2021 were $3.1 million.

Cash flows used in financing activities of our continuing operations for the six
months ended December 31, 2022 were $19.0 million, which consisted of principal
and accrued interest payments of $18.4 million on the promissory note payable to
Forest, our related party, as well as distributions to non-controlling interests
in GESOF of $0.6 million. Cash flows provided by financing activities of our
discontinued operations for the six months ended December 31, 2022 were $0.6
million.

Cash flows provided by financing activities of our continuing operations for the
six months ended December 31, 2021 were $41 thousand, while cash flows provided
by financing activities of our discontinued operations for the same period were
$0.5 million.

Financial Condition

As of December 31, 2022, we had an unrestricted cash balance of $19.0 million.
We also held 1,569,787 shares of GECC common stock with an estimated fair value
of $13.0 million as of December 31, 2022.

The completion of transactions in January 2023 discussed in Note 14 - Subsequent
Events to the accompanying unaudited condensed consolidated financial statements
provided an additional $70.9 million in unrestricted cash available for
deployment.

Borrowings



As of December 31, 2022, 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 subject to compliance with a
net consolidated debt to equity ratio.

As of December 31, 2022, 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.

As of December 31, 2022, GECM had $3.7 million outstanding with respect to the
Seller Note. The Seller Note is due on August 4, 2023 and is payable at GECM's
option with either cash or newly issued GEG shares (subject to shareholder
approval). There are no prepayment penalties. The Seller Note bears interest at
6.5%, which is paid quarterly.

As of December 31, 2022, FM Acquisition had $19.7 million outstanding with respect to the promissory note issued by GEG and FM Acquisition in favor of Forest (the Forest Note). The Forest Note was due on March 1, 2023 but was repaid in full on January 3, 2023.


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Off-Balance Sheet Arrangements

As of December 31, 2022, we did not have any off-balance sheet arrangements.

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, 2022.

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