Great Elm Group, Inc. 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures The Company’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act ) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective as of June 30, 2023. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for preparation of the accompanying consolidated financial statements in accordance with US GAAP. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2023 as required by the Exchange Act. In making this assessment, we used the criteria set forth in the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework, management concluded that our internal control over financial reporting was effective as of June 30, 2023. Changes in Internal Control Over Financial Reporting T here have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 18 PART III Item 10 . Directors, Executive Officers and Corporate Governance. The information required by this item will be contained in our definitive proxy statement ( Proxy Statement ) and is hereby incorporated by reference thereto. Item 11. Executive Compensation. The information required by this item will be contained in our Proxy Statement and is hereby incorporated by reference thereto. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be contained in our Proxy Statement and is hereby incorporated by reference thereto. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be contained in our Proxy Statement and is hereby incorporated by reference thereto. Item 14. Principal Accountant Fees and Services. The information required by this item will be contained in our Proxy Statement and is hereby incorporated by reference thereto. PART IV Item 15. Exhibits, Financ ial Statement Schedules. Financial Statements The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 15 by reference. Financial Statement Schedules Schedules are omitted because they are not required or are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Exhibits The exhibit index attached hereto is incorporated by reference. EXH IBIT INDEX Unless otherwise indicated, all references are to filings by Great Elm Group, Inc. (the Registrant ) with the Securities and Exchange Commission under File No. 001-39832 Exhibit No. Description 3.1 Certificate of Incorporation of the Registrant, dated October 23, 2020 (incorporated by reference to the Exhibit 3.1 to the Form 8-K filed on December 29, 2020) 3.2 Amended and Restated Bylaws of the Registrant, dated November 14, 2022 (incorporated by reference to the Exhibit 3.1 to the Form 8-K filed on November 14, 2022) 4.1 Form of the Registrant’s Common Stock Certificate (incorporated by reference to the Exhibit 4.1 to the Form 8-K filed on December 29, 2020) 4.2 Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock of the Registrant, dated December 23, 2020 (incorporated by reference to the Exhibit 4.2 to the Form 8-K filed on December 29, 2020) 4.3 Stockholders’ Rights Agreement, dated December 29, 2020, by and between the Registrant and Computershare Trust Company, N.A. (incorporated by reference to the Exhibit 4.3 to the Form 8-K filed on December 29, 2020) 19 4.4 Form of 5.0% Convertible Senior PIK Notes due 2030 (incorporated by reference to the Exhibit 4.4 to the Form 8-K filed on December 29, 2020) 4.5 Form of Amendment to 5.0% Convertible Senior PIK Notes due 2030 (incorporated by reference to the Exhibit 4.1 to the Form 10-Q filed on May 14, 2021) 4.6 Registration Rights Agreement, dated as of February 26, 2020, by and between Great Elm Capital Group, Inc. and certain accredited investors party thereto (incorporated by reference to the Exhibit 4.5 to the Form 8-K filed on December 29, 2020) 4.7 Description of Securities (incorporated by reference to the Exhibit 4.7 to the Form 10-K filed on September 12, 2022) 4.8 Base Indenture, dated as of June 9, 2022, by and between Great Elm Group, Inc. and American Stock and Transfer & Trust Company, LLC, as Trustee (incorporated by reference to the Exhibit 4.1 to the Form 8-K filed on June 9, 2022) 4.9 First Supplemental Indenture, dated as of June 9, 2022, by and between Great Elm Group, Inc. and American Stock and Transfer & Trust Company, LLC, as Trustee (incorporated by reference to the Exhibit 4.2 to the Form 8-K filed on June 9, 2022) 4.10 Form of 7.25% Note Due 2027 (incorporated by reference to the Exhibit 4.3 to the Form 8-K filed on June 9, 2022) 4.11 Amended and Restated Stockholders Agreement of Forest Investments, Inc., dated December 30, 2022, among Forest Investments, Inc., the Registrant and J.P. Morgan Broker-Dealer Holdings, Inc. (incorporated by reference to the Exhibit 4.2 to the Form 8-K filed on January 3, 2023) 10.1+ Severance Agreement, dated May 4, 2023, by and between the Registrant and Peter A. Reed (incorporated by reference to the Exhibit 10.1 to the Form 8-K filed on May 5, 2023) 10.2+ Consulting Agreement, dated May 4, 2023, by and between the Registrant and Peter A. Reed (incorporated by reference to the Exhibit 10.2 to the Form 8-K filed on May 5, 2023) 10.3+ Offer Letter, dated May 4, 2023, by and between the Registrant and Jason W. Reese (incorporated by reference to the Exhibit 10.3 to the Form 8-K filed on May 5, 2023) 10.4+ Offer Letter, dated December 29, 2020 between Adam Kleinman and the Registrant (incorporated by reference to the Exhibit 10.2 to the Form 8-K filed on December 29, 2020) 10.5+ Separation and General Release Agreement, dated May 15, 2023, by and between the Registrant and Brent J. Pearson (incorporated by reference to the Exhibit 10.1 to the Form 8-K filed on May 15, 2023) 10.6+ Offer Letter, dated May 15, 2023, by and between the Registrant and Keri A. Davis (incorporated by reference to the Exhibit 10.2 to the Form 8-K filed on May 15, 2023) 10.7+ Employment Letter, dated August 30, 2022, between Great Elm Capital Management, Inc. and Nichole Milz (incorporated by reference to the Exhibit 10.1 to the Form 8-K filed on September 6, 2022) 10.8+ Compensation Plan Agreement, dated December 29, 2020, by and between Great Elm Capital Group, Inc. and the Registrant (incorporated by reference to the Exhibit 10.4 to the Form 8-K filed on December 29, 2020) 10.9+ Form of Director and Officer Indemnification Agreement (incorporated by reference to the Exhibit 10.5 to the Form 8-K filed on December 29, 2020) 10.10+ Great Elm Group, Inc. Amended and Restated 2016 Long-Term Incentive Compensation Plan (As Amended, Effective November 21, 2022) (incorporated by reference to Exhibit 10.1 to the Form 8-K of Great Elm Group, Inc. filed on November 21, 2022) 10.11+ 2016 Employee Stock Purchase Plan (incorporated by reference to Annex E to the Proxy Statement filed on May 25, 2016 by Great Elm Capital Group, Inc. (File No. 001-16073)) 10.12+ Form of Stock Option Award under the Registrant’s Amended and Restated 2016 Long-Term Incentive Compensation Plan 10.13+ Form of Restricted Stock Unit Award (Directors) under the Registrant’s Amended and Restated 2016 Long-Term Incentive Compensation Plan 10.14+ Form of Restricted Stock Unit Award (Employees) under the Registrant’s Amended and Restated 2016 Long-Term Incentive Compensation Plan 20 10.15+ Form of Restricted Stock Award (Directors) under the Registrant’s Amended and Restated 2016 Long-Term Incentive Compensation Plan 10.16+ Form of Restricted Stock Award (Employees) under the Registrant’s Amended and Restated 2016 Long-Term Incentive Compensation Plan 10.17+ Amended and Restated Great Elm Capital Management Performance Bonus Plan, dated February 6, 2019, (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 8, 2019 by Great Elm Capital Group, Inc. (File No. 001-16073)) 10.18 Transaction Agreement, dated March 10, 2021, by and among the Registrant, MAST Capital Management, LLC and David Steinberg (incorporated by reference to the Exhibit 10.1 to the Form 10-Q filed on May 14, 2021) 10.19 Amended and Restated Investment Management Agreement (As Amended, Effective August 1, 2022), by and between Great Elm Capital Corp. and Great Elm Capital Management, Inc. (incorporated by reference to Exhibit g to the Form N-2 filed on June 16, 2023 by Great Elm Capital Corp. (File No. 333-272790)) 10.20 Administration Agreement, dated as of September 27, 2016, by and between Great Elm Capital Corp. and Great Elm Capital Management, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on November 7, 2016 by Great Elm Capital Corp. (File No. 814-01211)) 10.21 Profit Sharing Agreement, dated as of November 3, 2016, by and between Great Elm Capital Management, Inc. and Great Elm Capital GP, LLC (formerly GECC GP Corp.) (incorporated by reference to Exhibit 10.6 to the Form 8-K filed on November 9, 2016) 14.1 Code of Conduct of Great Elm Group, Inc. (incorporated by reference to the Exhibit 14.1 to the Form 8-K filed on September 20, 2023) 21.1 Subsidiaries of the Registrant. 23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm 23.2 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm 31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Audited financial statements of Great Elm Capital Corp. (incorporated by reference to the annual report on Form 10-K filed on March 2, 2023 by Great Elm Capital Corp. (File No. 814-01211)) 101 Materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023, formatted in inline Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest, (iv) Consolidated Statements of Cash Flows, and (v) related Notes to the Consolidated Financial Statements, tagged in detail (furnished herewith). 104 The cover page from the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023, formatted in inline XBRL (included as Exhibit 101). * Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. GEG hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission. + Indicates a management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary. We have elected not to provide a Form 10-K summary. 21 SIGNAT URES Pursuant to the requirements of Section 13 or 15(d) 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 as of September 20, 2023. GREAT ELM GROUP, INC. By: /s/ Jason W. Reese Name: Jason W. Reese Title: Chief Executive Officer & Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of September 20, 2023. Signature Title /s/ Jason W. Reese Chief Executive Officer & Chairman Jason W. Reese (Principal Executive Officer) /s/ Keri A. Davis Chief Financial Officer & Chief Accounting Officer Keri A. Davis (Principal Financial and Accounting Officer) /s/ Matthew A. Drapkin Director Matthew A. Drapkin /s/ James H. Hugar Director James H. Hugar /s/ David Matter Director David Matter /s/ James P. Parmelee Director James P. Parmelee /s/ Eric J. Scheyer Director Eric J. Scheyer 22 INDEX TO FINANC IAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 248 ) F- 2 Consolidated Balance Sheets at June 30, 2023 and 2022 F- 4 Consolidated Statements of Operations for the years ended June 30, 2023 and 2022 F- 5 Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the years ended June 30, 2023 and 2022 F- 6 Consolidated Statements of Cash Flows for the years ended June 30, 2023 and 2022 F- 7 Notes to the Consolidated Financial Statements F- 9 F- 1 Report of Independent Regist ered PUBLIC Accounting Firm Board of Directors and Shareholders Great Elm Group, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Great Elm Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and contingently redeemable non-controlling interest, and cash flows for each of the two years in the period ended June 30, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Taxable Gain on Certain Divestitures As discussed in Note 2 to the consolidated financial statements, the Company recognizes in its financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination based on the technical merits of the position. Certain divestitures involve complex tax matters in determining the taxable gain that require the evaluation of the recognition and measurement of the tax position taken. The accounting for the recognition and measurement of such tax position requires management to make significant judgments and interpretations to determine whether available information supports the assertion that the more-likely-than-not recognition threshold is met. As a result, we have determined that the evaluation of the more-likely-than-not threshold for the tax position related to the determination of the taxable gain on certain divestitures is a critical audit matter. F- 2 The principal consideration for our determination that this is a critical audit matter is management’s significant judgments about and complex considerations of the Internal Revenue Code (Code), related Treasury regulations, and Internal Revenue Service (IRS) rulings. The complexity and subjective nature of management’s conclusions required a high degree of auditor judgment. Our audit procedures related to the Company’s evaluation of the tax positions related to the determination of the taxable gain on certain divestitures included the following, among others: • We obtained and inspected the support for the more-likely-than-not tax conclusion provided to the Company by its external tax experts, and we discussed the conclusion with said experts; • We evaluated the reasonableness of the conclusions reached in the aforementioned support based on the facts and circumstances of the transaction, the Code, Treasury regulations, and IRS rulings considered by management and their external tax experts as well as our independent research of the Code, Treasury regulations, and IRS rulings; • We utilized firm tax professionals with specialized skill and knowledge to assist in the performance of these audit procedures. /s/ Grant Thornton LLP We have served as the Company’s auditor since 2019. Boston, Massachusetts September 20, 2023 F- 3 GREAT ELM GROUP, INC. CONSOLIDATED B ALANCE SHEETS Dollar amounts in thousands, except per share amounts ASSETS June 30, 2023 June 30, 2022 Current assets Cash and cash equivalents $ 60,165 $ 22,281 Receivables from managed funds 3,308 2,445 Investments in marketable securities 24,595 - Investments, at fair value (cost $ 40,387 and $ 68,766 , respectively) 32,611 48,042 Prepaid and other current assets 717 665 Assets of Consolidated Fund: Investments, at fair value (cost $ 2,432 ) - 1,797 Prepaid expenses - 746 Real estate under development 1,742 - Current assets held for sale - 8,464 Total current assets 123,138 84,440 Identifiable intangible assets, net 12,115 13,250 Right-of-use assets 497 733 Other assets 143 103 Non-current assets held for sale - 69,561 Total assets $ 135,893 $ 168,087 LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 191 $ 8 Accrued expenses and other current liabilities 5,418 3,845 Current portion of related party payables 1,409 486 Current portion of lease liabilities 359 341 Liabilities of Consolidated Fund - accrued expenses and other - 11 Current liabilities held for sale - 15,003 Total current liabilities 7,377 19,694 Lease liabilities, net of current portion 142 472 Long-term debt (face value $ 26,945 ) 25,808 25,532 Related party payables, net of current portion 926 1,120 Related party notes payable, net of current portion - 6,270 Convertible notes (face value $ 37,912 and $ 36,085 , including $ 15,395 and $ 15,133 held by related parties, respectively) 37,129 35,187 Redeemable preferred stock of subsidiaries (held by related parties, face value $ 35,010 ) - 34,099 Other liabilities 669 908 Non-current liabilities held for sale - 2,551 Total liabilities 72,051 125,833 Commitments and contingencies (Note 18) Contingently redeemable non-controlling interest - 2,225 Stockholders' equity Preferred stock, $ 0.001 par value; 5,000,000 authorized and zero outstanding - - Common stock, $ 0.001 par value; 350,000,000 shares authorized and 30,651,047 shares issued and 29,546,655 outstanding at June 30, 2023; and 28,932,444 shares issued and 28,507,490 outstanding at June 30, 2022 30 29 Additional paid-in-capital 3,315,378 3,312,763 Accumulated deficit ( 3,251,566 ) ( 3,279,296 ) Total Great Elm Group, Inc. stockholders' equity 63,842 33,496 Non-controlling interest - 6,533 Total stockholders' equity 63,842 40,029 Total liabilities, non-controlling interest and stockholders' equity $ 135,893 $ 168,087 The accompanying notes are an integral part of these consolidated financial statements. F- 4 GREAT ELM GROUP, INC. CONSOLIDATED STATEM ENTS OF OPERATIONS Amounts in thousands, except per share data For the twelve months ended June 30, 2023 2022 Revenues $ 8,663 $ 4,516 Operating costs and expenses: Investment management expenses 10,196 6,616 Depreciation and amortization 1,152 524 Selling, general and administrative 8,480 5,982 Expenses of Consolidated Fund 46 135 Total operating costs and expenses 19,874 13,257 Operating loss ( 11,211 ) ( 8,741 ) Dividends and interest income 6,209 3,161 Net realized and unrealized gain (loss) on investments 15,247 ( 7,571 ) Net realized and unrealized loss on investments of Consolidated Fund ( 16 ) ( 525 ) Gain on sale of controlling interest in subsidiary 10,524 - Interest expense ( 6,074 ) ( 5,546 ) Income (loss) before income taxes from continuing operations 14,679 ( 19,222 ) Income tax expense ( 200 ) ( 83 ) Net income (loss) from continuing operations 14,479 ( 19,305 ) Discontinued operations: Net income from discontinued operations 13,201 4,268 Net income (loss) $ 27,680 $ ( 15,037 ) Less: net (loss) income attributable to non-controlling interest, continuing operations ( 1,554 ) 684 Less: net income (loss) attributable to non-controlling interest, discontinued operations 1,504 ( 828 ) Net income (loss) attributable to Great Elm Group, Inc. $ 27,730 $ ( 14,893 ) Basic net income (loss) per share from: Continuing operations $ 0.55 $ ( 0.75 ) Discontinued operations 0.40 0.19 Basic net income (loss) per share $ 0.95 $ ( 0.56 ) Diluted net income (loss) per share from: Continuing operations $ 0.44 $ ( 0.75 ) Discontinued operations 0.29 0.19 Diluted net income (loss) per share $ 0.73 $ ( 0.56 ) Weighted average shares outstanding Basic 28,910 26,784 Diluted 40,980 26,784 The accompanying notes are an integral part of these consolidated financial statements. F- 5 GREAT ELM GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND CONTINGENTLY REDEEMABLE NON-CONTROLLING INTEREST Common Stock Additional Paid-in Accumulated Total Great Elm Group, Inc. Stockholders' Non- controlling Total Stockholders' Contingently Redeemable Non-controlling Shares Amount Capital Deficit Equity Interest Equity Interest BALANCE, June 30, 2021 25,948 $ 26 $ 3,307,613 $ ( 3,264,403 ) $ 43,236 $ 9,549 $ 52,785 $ 2,639 Net loss (income) - - - ( 14,893 ) ( 14,893 ) 270 ( 14,623 ) ( 414 ) Issuance of common stock related to vesting of restricted stock 1,189 1 - - 1 - 1 - Repurchase of interests in subsidiary - - ( 129 ) - ( 129 ) 86 ( 43 ) - Issuance of common stock related to asset purchase 1,370 2 2,477 - 2,479 - 2,479 - Issuance of interests in Consolidated Fund - - - - - 527 527 - Distributions of interests in Consolidated Fund - - - - - ( 3,899 ) ( 3,899 ) - Stock-based compensation - - 2,802 - 2,802 - 2,802 - BALANCE, June 30, 2022 28,507 $ 29 $ 3,312,763 $ ( 3,279,296 ) $ 33,496 $ 6,533 $ 40,029 $ 2,225 Net income (loss) - - - 27,730 27,730 ( 802 ) 26,928 752 Distributions to non-controlling interests in Consolidated Fund - - - - - ( 634 ) ( 634 ) - Redemption of non-controlling interests upon sale of subsidiaries - - - - - ( 5,097 ) ( 5,097 ) ( 2,977 ) Issuance of common stock related to vesting of restricted stock 1,040 1 - - 1 - 1 - Stock-based compensation - - 2,615 - 2,615 - 2,615 - BALANCE, June 30, 2023 29,547 $ 30 $ 3,315,378 $ ( 3,251,566 ) $ 63,842 $ - $ 63,842 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 6 GREAT ELM GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Dollar amounts in thousands For the twelve months ended June 30, 2023 2022 Cash flows from operating activities: Net income (loss) from continuing operations $ 14,479 $ ( 19,305 ) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 1,152 524 Stock-based compensation 2,615 2,802 Sales of investments by Consolidated Fund 1,558 41,692 Purchases of investments by Consolidated Fund - ( 18,518 ) Stock dividends received - ( 350 ) Unrealized loss on investments from Consolidated Fund - 311 Realized loss on investments from Consolidated Fund 16 214 Unrealized gain on investments ( 10,948 ) ( 623 ) Realized (gain) loss on investments ( 4,299 ) 8,194 Gain on sale of controlling interest in subsidiary ( 10,524 ) - Non-cash interest and amortization of capitalized issuance costs 2,299 2,048 Change in fair value of contingent consideration 783 - Other non-cash expense, net 470 - Changes in operating assets and liabilities: Receivables from managed funds ( 1,159 ) ( 876 ) Prepaid assets, deposits, and other assets 1,012 179 Real estate under development ( 1,682 ) - Operating leases ( 77 ) ( 22 ) Related party payables - 486 Accounts payable, accrued expenses and other liabilities 1,166 305 Net cash (used in) provided by operating activities - continuing operations ( 3,139 ) 17,061 Net cash provided by operating activities - discontinued operations 766 12,219 Net cash (used in) provided by operating activities ( 2,373 ) 29,280 Cash flows from investing activities: Acquisition of assets - ( 824 ) Proceeds from sale of controlling interest in subsidiary, net of cash sold 17,735 - Purchases of investments ( 3,105 ) ( 20,468 ) Purchases of investments in marketable securities ( 24,384 ) - Sales of investments 26,540 5,499 Participation in related party rights offering - ( 17,500 ) Purchases of property and equipment ( 53 ) ( 3 ) Net cash provided by (used in) investing activities - continuing operations 16,733 ( 33,296 ) Net cash provided by (used in) investing activities - discontinued operations 67,230 ( 6,751 ) Net cash provided by (used in) investing activities 83,963 ( 40,047 ) F- 7 GREAT ELM GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Dollar amounts in thousands For the twelve months ended June 30, 2023 2022 Cash flows from financing activities: Proceeds from issuance of debt - 26,945 Capitalized issuance costs - ( 1,429 ) Principal payments on related party notes payable ( 41,765 ) - Repurchases of interests in subsidiary - ( 43 ) Distributions to non-controlling interests in Consolidated Fund ( 634 ) ( 3,899 ) Due to broker of Consolidated Fund - ( 11,379 ) Capital contributions from non-controlling interests in Consolidated Fund - 27 Net cash (used in) provided by financing activities - continuing operations ( 42,399 ) 10,222 Net cash used in financing activities - discontinued operations ( 5,221 ) ( 242 ) Net cash (used in) provided by financing activities ( 47,620 ) 9,980 Net increase (decrease) in cash and cash equivalents, including cash and cash equivalents classified within current assets held for sale 33,970 ( 787 ) Less: net increase in cash and cash equivalents classified within current assets held for sale 62,775 5,226 Plus: cash received from discontinued operations 66,689 9,549 Net increase in cash and cash equivalents 37,884 3,536 Cash and cash equivalents at beginning of period 22,281 18,745 Cash and cash equivalents at end of period $ 60,165 $ 22,281 Cash paid for interest $ 3,831 $ 3,512 Non-cash investing and financing activities Lease liabilities and right-of-use assets arising from operating leases $ 167 $ - Partial settlement of Seller Note in exchange for GECC stock $ 2,609 $ - Non-cash distributions received from Consolidated Fund $ 177 $ - Equity consideration upon Sale of HC LLC $ 2,000 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 8 GREAT ELM GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 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 ( GEC GP ), Great Elm FM Acquisition, Inc. ( FM Acquisition ), Great Elm DME Holdings, Inc. ( DME Holdings ), Great Elm DME Manager, LLC ( DME Manager ), and Monomoy BTS Corporation ( MBTS ), as well as its majority-owned subsidiaries Forest Investments, Inc. ( Forest ) (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 and Use of Estimates The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). The preparation of financial statements in accordance with 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. 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 consolidated statements of operations and cash flows for the years ended June 30, 2023 and 2022 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. See Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations. Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. Certain prior period amounts have been reclassified to conform to current period presentation. 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 as of the financial statement date. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests. 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. All intercompany accounts and transactions have been eliminated in consolidation. F- 9 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. See Note 15 - Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries . 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 the 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 debt securities, such as the 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 (loss) on investments. Held-to-maturity securities are measured at amortized cost with realized gains and losses reported within net realized and unrealized gain (loss) 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 June 30, 2023 all investments in marketable securities were classified as held-to-maturity and had original maturities (at the time of purchase) of six months. As of June 30, 2023 , 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 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 (loss) on investments. Dividends received are recorded within dividends and interest income on the consolidated statements of operations. 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. F- 10 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. Identifiable Intangible Assets, Net The Company's identifiable intangible assets consist of investment management agreements and assembled workforce. These intangible assets arise primarily from the determination of their respective fair market values at the date of acquisition. Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation techniques and management estimates. The Company’s definite-lived intangible assets are amortized over their estimated useful lives based upon the pattern of future cash flows attributable to the asset or using the straight-line method as determined for each asset. The Company amortizes its definite-lived intangible assets over periods ranging from ten to fifteen years . 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 asset 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. Certain of the Company’s office leases contain options that permit extensions for additional periods. If we are not reasonably certain to exercise the option to extend at lease commencement, the respective extension period is not included within the lease term and the associated payments are not included in the measurement of the right-of-use asset and lease liability. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet, and lease expense is recognized on a straight-line basis over the term of the short-term lease. 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. See Note 11 - Leases for additional information about the Company’s leases. Investment Management Expenses The Company classifies all direct expenses incurred under its investment management agreements, such as payroll, stock-based compensation, and related taxes and benefits; facilities costs; and consulting fees in investment management expenses in the consolidated statements of operations. F- 11 Stock-Based Compensation We issue equity awards to eligible employees and directors, generally in the form of stock options, restricted stock awards and restricted stock units. The compensation cost for all equity awards is measured at their grant-date fair value. For the awards that do not contain performance or market conditions, the related compensation expense is recognized on a straight-line basis over the employee’s requisite service period, which is generally the vesting period, or the non-employee’s vesting period. For the awards that contain both performance and service conditions, the Company recognizes compensation expense over the requisite service period using the accelerated vesting attribution method when achievement of the performance condition is probable. For the awards that contain both market and service conditions, the Company recognizes compensation expense over the requisite service period using the accelerated vesting attribution method. The grant-date fair value of stock options that do not contain market conditions is estimated using the Black-Scholes-Merton option pricing model, which requires management to make the following assumptions: • Risk-free interest rate is based on the U.S. Treasury instruments, the terms of which are consistent with the expected term of the Company’s stock options. • Expected dividend is based on the Company’s history and expectation of dividend payouts. • Expected term represents the number of years the options are expected to be outstanding from grant date based on historical option exercise experience. • Expected volatility is estimated based on the historical volatility of the Company’s stock price over a period equal to the expected life of each option grant. The Company estimates the grant-date fair value and requisite service period of stock options with market conditions using a combination of the Monte Carlo simulation and Black-Scholes-Merton option pricing models, applying the assumptions discussed above. The Company measures the grant-date fair value of restricted stock awards and restricted stock units using the Company’s stock price on the date of grant. The Company accounts for forfeitures when they occur. The stock-based compensation expense is classified in the consolidated statements of operations in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary, in order to reduce deferred tax assets to the amounts more likely than not to be recovered. The Company has established a valuation allowance for its deferred tax assets that are not recoverable from taxable temporary differences because the Company is unable to conclude that future utilization of a portion of its net operating loss carryforwards and other deferred tax assets is more likely than not. F- 12 The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations for federal and several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. GAAP provides guidance on the accounting for and disclosure of uncertainty in tax positions and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more likely than not" of being sustained by the applicable taxing authority. The Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. In making these assessments, the Company determines the accounting recognition based on the technical merits of the position and consults with external tax experts as appropriate. The Company does not recognize income tax benefits for positions that it takes on its income tax returns that do not meet the more likely than not standard on its technical merits. Asset Acquisitions Asset acquisitions are accounted for using the cost accumulation method. Determining whether the acquired set represents an asset acquisition or a business combination requires quantitative and qualitative assessments subject to judgment. In an asset acquisition, acquisition costs are capitalized as part of the acquired set. The accounting for asset acquisitions requires estimates and judgment to allocate the incurred costs among the assets acquired using their relative fair value. As such, the values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. F- 13 Net Income (Loss) Per Share The following table presents the calculation of basic and diluted net income (loss) per share: For the twelve months ended June 30, (in thousands except per share amounts) 2023 2022 Numerator: Net income (loss) from continuing operations $ 14,479 $ ( 19,305 ) Less: net (loss) income attributable to non-controlling interest, continuing operations ( 1,554 ) 684 Numerator for basic EPS - Net income (loss) from continuing operations attributable to Great Elm Group, Inc. $ 16,033 $ ( 19,989 ) Net income from discontinued operations 13,201 4,268 Less: net income (loss) attributable to non-controlling interest, discontinued operations 1,504 ( 828 ) Numerator for basic EPS - Net income from discontinued operations, attributable to Great Elm Group, Inc. $ 11,697 $ 5,096 Effect of dilutive securities: Interest expense associated with Convertible Notes, continuing operations $ 1,943 $ - Numerator for diluted EPS - Net income (loss) from continuing operations attributable to Great Elm Group, Inc., after the effect of dilutive securities $ 17,976 $ ( 19,989 ) Numerator for diluted EPS - Net income from discontinued operations, attributable to Great Elm Group, Inc. $ 11,697 $ 5,096 Denominator: Denominator for basic EPS - Weighted average shares of common stock outstanding 28,910 26,784 Effect of dilutive securities: Restricted stock 1,152 - Convertible Notes 10,918 - Denominator for diluted EPS - Weighted average shares of common stock outstanding after the effect of dilutive securities 40,980 26,784 Basic net income (loss) per share from: Continuing operations $ 0.55 $ ( 0.75 ) Discontinued operations 0.40 0.19 Basic net income (loss) per share $ 0.95 $ ( 0.56 ) Diluted net income (loss) per share from: Continuing operations $ 0.44 $ ( 0.75 ) Discontinued operations $ 0.29 0.19 Diluted net income (loss) per share $ 0.73 $ ( 0.56 ) F- 14 As of June 30, 2023 the Company had 3,264,424 potential shares of common stock issuable upon the exercise of stock options that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive for the twelve months ended June 30, 2023. As of June 30, 2022, the Company had 13,839,273 potential shares of common stock, including 10,392,545 shares of common stock issuable upon the conversion of Convertible Notes (as defined below), 1,312,436 potential shares issuable upon vesting of restricted stock units and restricted stock awards, and 2,134,292 potential shares of common stock issuable upon the exercise of stock options that are not included in the diluted net income (loss) per share calculation for the twelve months ended June 30, 2022 because to do so would be anti-dilutive. As of June 30, 2023 and 2022, the Company had an aggregate of 1,151,430 and 1,216,481 issued shares, respectively, that are not considered outstanding for accounting purposes since they are unvested and subject to forfeiture by the employees at a nominal price if service milestones are not met. Concentration of Risk The Company’s revenues from continuing operations and related receivables are primarily attributable to the management of Great Elm Capital Corp. ( GECC ) and Monomoy UpREIT, LLC ( Monomoy UpREIT ) investment vehicles. See Note 7 - Related Party Transactions . Recently Issued 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 is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements. Reference Rate Reform. In March 2020 and January 2021, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , and ASU 2021-01, Reference Rate Reform (Topic 848): Scope , which provide optional expedients and exceptions for applying US GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate ( LIBOR ) if certain criteria are met. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 , extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. The Company adopted these ASUs as of July 1, 2023 , which did no t have any impact on its consolidated financial statements. 3. Forest Note and Transactions with JPM Forest Note On December 29, 2022, in connection with the Stock Purchase Agreement and Stockholders Agreement, each defined below, GEG and FM Acquisition issued a promissory note in favor of Forest in an aggregate principal amount equal to $ 38.1 million (the Forest Note ), in exchange for the transfer to FM Acquisition of $ 3.3 million of Series A-1 preferred interests and $ 34.0 million of S eries A-2 preferred interests held by Forest in HC LLC plus, in each case, accrued dividends thereon to the date of transfer. The Forest Note had a maturity date of March 1, 2023 and bore interest at a fixed rate of 9 % per annum. On December 30, 2022, in connection with the Transactions with JPM, as defined below, t he Company partially repaid the Forest Note in the amount of $ 18.4 million. The remaining balance, inclusive of accrued interest, due to F- 15 Forest under the Forest Note of $ 19.7 million was subsequently paid in full on January 3, 2023 using the proceeds from the Sale of HC LLC (see Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations). During the year ended June 30, 2023 , the Company recorded interest expense of $ 19 thousand with respect to the Forest Note. Sale of Controlling Interest in Forest On December 30, 2022, GEG and 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 owned by FM Acquisition and GEG, which constituted 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 ). Upon execution of the Stock Purchase Agreement, the Company deconsolidated Forest and recognized an investment in respect to its retained 19 % non-controlling interest in Forest (the Investment in Forest ) in the amount of $ 2.1 million . The following table shows calculation of the recorded gain on sale of controlling interest in subsidiary of $ 10.5 million on the Company's consolidated statement of operations for the year ended June 30, 2023: (in thousands) December 30, 2022 Cash proceeds $ 18,409 Fair value of retained 19 % non-controlling interest in Forest 2,128 Carrying value of non-controlling interest prior to sale 2,120 22,657 Less: Carrying value of net assets disposed 12,133 Gain on Sale of Controlling Interest in Forest $ 10,524 The Investment in Forest was determined to be an equity security measured at fair value within Level 3 of the fair value hierarchy. As a result of Forest joining the JPM consolidated group, we recognized a gain on our Investment in Forest of $ 24.4 million during the year ended June 30, 2023 (prior to exercise of the Put Option as defined below) within net realized and unrealized gain (loss) on investments on the consolidated statement of operations. The Sale of Controlling Interest in Forest did not meet the criteria for presentation as discontinued operations. The following table shows loss before income taxes of Forest, as well as loss before income taxes of Forest attributable to the Company: For the twelve months ended June 30, (in thousands) 2023 2022 Loss before income taxes ( 2,679 ) ( 2,637 ) Loss before income taxes attributable to Great Elm Group, Inc. ( 1,133 ) ( 3,542 ) Put Option 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 , together with the Sale of Controlling Interest in Forest referred to as the Transactions with JPM ) to sell the Investment in Forest for the then fair market value. On January 17, 2023, the Company exercised the Put Option and sold the Investment in Forest for $ 26.5 million in cash, resulting in an additional gain on our Investment in Forest for the year ended June 30, 2023 of $ 25 thousand recorded within net realized and unrealized gain (loss) on investments on the consolidated statement of operations. F- 16 4. Assets and Liabilities Held for Sale and Discontinued Operations On January 3, 2023, DME Holdings along with the minority owners of 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 ( 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 , pending finalization of working capital adjustments. The following table shows calculation of the initial gain on Sale of HC LLC of $ 13.6 million : (in thousands) January 3, 2023 Net cash proceeds, after transaction costs and distributions to non-controlling interests $ 64,093 Fair value of shares of Quipt stock 2,000 Indemnity escrow receivable attributable to GEG and subsidiaries 320 Carrying value of non-controlling interest prior to sale (permanent equity) 2,977 Carrying value of non-controlling interest prior to sale (temporary equity) 2,977 Estimated future distributions of proceeds to non-controlling interests ( 1,144 ) 71,223 Less: Carrying value of net assets disposed 57,671 Gain on Sale of HC LLC $ 13,552 The Company concluded that the disposal group satisfied the criteria for presentation as held for sale and discontinued operations. In the fourth quarter of fiscal 2023, we recorded a loss of $ 0.3 million following finalization of working capital adjustments to the initial sales price for HC LLC, with the respective payment to Quipt made in September 2023. The following table provides a reconciliation of the Company’s net income from discontinued operations presented in the consolidated statements of operations: For the twelve months ended June 30, (in thousands) 2023 2022 Discontinued operations: Durable medical equipment sales and services revenue $ 21,574 $ 41,720 Durable medical equipment rental income 11,874 21,738 Net revenue 33,448 63,458 Cost of durable medical equipment sold and services ( 8,654 ) ( 16,795 ) Cost of durable medical equipment rentals ( 4,263 ) ( 7,149 ) Durable medical equipment other operating expenses ( 17,519 ) ( 32,561 ) Depreciation and amortization ( 783 ) ( 1,737 ) Transaction costs ( 2,462 ) ( 582 ) Interest expense ( 46 ) ( 240 ) Loss on extinguishment of debt ( 23 ) ( 190 ) Other (expense) income, net ( 50 ) 2 Gain on disposal of discontinued operations 13,264 - Income before income taxes from discontinued operations 12,912 4,206 Income tax benefit 289 62 Net income from discontinued operations $ 13,201 $ 4,268 F- 17 The following table provides a reconciliation of the assets and liabilities held for sale presented in the consolidated balance sheet as of June 30, 2022: (in thousands) June 30, 2022 Cash and cash equivalents $ 1,314 Accounts receivable 5,867 Inventories 898 Prepaid and other current assets 385 Current assets held for sale $ 8,464 Property and equipment, net $ 521 Equipment held for rental, net 7,504 Identifiable intangible assets, net 5,921 Goodwill 52,463 Right-of-use assets 2,989 Other assets 163 Non-current assets held for sale $ 69,561 Accounts payable $ 6,030 Accrued expenses and other current liabilities 3,544 Deferred revenue 1,218 Current portion of lease liabilities 1,218 Current portion of equipment financing debt 2,993 Current liabilities held for sale $ 15,003 Lease liabilities, net of current portion $ 1,903 Redeemable preferred stock of subsidiaries 648 Non-current liabilities held for sale $ 2,551 5. Acquisitions Acquisition of Monomoy UpREIT Investment Management Agreement On May 4, 2022 , the Company, through GECM, acquired the investment management agreement for Monomoy UpREIT and certain other related assets from Imperial Capital Asset Management, LLC ( ICAM ). Monomoy UpREIT is the operating partnership of Monomoy Properties REIT, LLC, a private real estate investment trust founded by ICAM, with a portfolio of diversified net leased industrial assets. The acquisition significantly increased and diversified GECM’s assets under management. In addition to the investment management agreement, GECM acquired the assembled workforce including eleven ICAM personnel involved in the operations of Monomoy UpREIT, as well as the lease for office space in Charleston, South Carolina, where these employees are based. In conjunction with the acquisition, the Company made an investment of $ 15.0 million into Monomoy UpREIT. The purchase consideration included an upfront purchase price of $ 10 million financed with a combination of: (i) $ 2.5 million in newly issued shares of GEG common stock, which equals 1,369,984 shares issued at $ 1.81 per share, which is the 30 -calendar day volume-weighted average of the closing sales price ending on April 14, 2022; (ii) $ 1.25 million in shares of GECC common stock owned by GEG and valued at the subscription price of the next GECC rights offering; and (iii) the Seller Note (as defined in Note 13 - Related Party Notes Payable and Long-Term Debt ) issued by GECM in an aggregate principal amount of approximately $ 6.3 million. The Company also incurred $ 0.8 million in direct transaction costs consisting primarily of professional fees. F- 18 The transaction was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable intangible asset related to the investment management agreement. The value of the investment management agreement was estimated under the income approach using a multi-period excess earnings method. The key inputs in the valuation included forecasted assets under management, revenue and expenses, and a discount rate of 19.5 %. The $ 11.9 million cost of the acquisition was allocated to assets acquired on the basis of their relative fair values. Specifically, the Company recognized $ 11.3 million and $ 0.6 million of intangible assets representing the acquired investment management agreement and assembled workforce with estimated useful lives of 15 years and 10 years, respectively. See Note 9 - Identifiable Intangible Assets, Net for additional details on the Company's intangible assets. 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 $ 2.0 million to ICAM if certain fee revenue thresholds are achieved during fiscal years ending June 30, 2023 and 2024. As of June 30, 2023, the Company determined that the fee revenue threshold for the year ending June 30, 2023 was achieved and the amount payable to ICAM was approximately $ 1.0 million, which was paid in July 2023. Further, the Company determined that the fee revenue threshold for the year ending June 30, 2024 was expected to be achieved as well, and the related amount payable to ICAM was recorded at present value of approximately $ 0.9 million, using a discount rate of 8.0 %. Consequently, as of June 30, 2023 , the contingent consideration of $ 1.9 million was included within the current portion of related party payables and related party payables, net of current portion, in the consolidated balance sheet. As of June 30, 2022, the contingent consideration of $ 1.1 million was included within the related party payables, net of current portion, in the consolidated balance sheet. 6. Revenue The Company's revenues are summarized in the following table: For the twelve months ended June 30, (in thousands) 2023 2022 Management fees $ 5,471 $ 3,612 Incentive fees 1,007 - Property management fees 1,122 171 Administration and service fees 1,063 733 Total revenues $ 8,663 $ 4,516 The Company recognizes revenue at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customers under agreements with each investment product, which 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 between GECM and GECC, Monomoy UpREIT, and other private funds (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 1.0 % to 1.5 % of the management fee assets specified within each agreement and are calculated and billed in arrears of the period, either monthly or quarterly. Property Management Fees Under the Monomoy UpREIT property management agreement, GECM is entitled to 4.0 % of monthly rent collected. These fees are collected monthly in arrears. Property management fee revenue is recognized over time as the services are provided. F- 19 Incentive Fees The Company earns incentive fees based on the investment management agreements GECM has with GECC and Monomoy Properties II, LLC ( MP II ), a feeder fund of Monomoy Properties REIT, LLC. 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 20 % of the performance-based metric specified within each agreement. Incentive fees are recognized when it is determined that they are no longer probable of significant reversal. During the year ended June 30, 2023, the Company recorded revenue in respect to the incentive fees due from GECC of $ 1.0 million . Administration and Service Fees The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimburses 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. 7. 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 twelve months ended June 30, (in thousands) 2023 2022 Net realized and unrealized loss on investments $ ( 9,410 ) $ ( 7,920 ) Net realized and unrealized loss on investments of Consolidated Fund ( 16 ) ( 525 ) Dividend income 4,349 2,809 (in thousands) June 30, 2023 June 30, 2022 Dividends receivable $ 300 $ 612 Investment management revenues receivable 2,167 1,241 Receivable for reimbursable expenses paid 841 592 Receivables from managed funds $ 3,308 $ 2,445 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 6 - Revenue for additional discussions of the fee arrangements. F- 20 Consolidated Funds GEO GP serves as the general partner of Great Elm Opportunities Fund I, LP ( GEOF ), a Delaware multi-series limited partnership. GECM serves as the investment manager of GEOF. As the general partner, GEO GP provides administrative services and oversees GECM’s management of the investment portfolio of GEOF. The Company determined that GEOF and Series A, Series B and Series C of GEOF are VIEs, and that the criteria for consolidation were only met for GEOF Series C, which was launched in November 2020 and subsequently merged into GESOF (as defined below). GEOF Series D was launched on January 1, 2023 and the Company determined that it was not a VIE. The contribution in the amount of $ 3.0 million made by GEG into GEOF Series D, representing 43 % ownership of the partnership interests in the fund, was determined to be an equity method investment and the Company elected the fair value option using the net asset value ( NAV ) practical expedient for this instrument with all changes in NAV reported in net realized and unrealized gain (loss) on investments on the consolidated statements of operations. GECM also served as the managing member of Great Elm SPAC Opportunity Fund, LLC ( GESOF or the Consolidated Fund ), a Delaware limited liability company, which was launched in February 2021, and managed the investment portfolio of GESOF. The Company determined that GESOF was a VIE and that the criteria for consolidation were met during the years ended June 30, 2023 and 2022. The operations of the Consolidated Fund were included in our consolidated financial statements. In July 2022, GESOF began to wind down and the Company received final distributions of cash and equity investments (in-kind) during the year ended June 30, 2023. The Company retained the specialized investment company accounting guidance under GAAP with respect to the Consolidated Fund during the periods it was consolidated. As such, investments of the Consolidated Fund were 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 in the Consolidated Fund were included in net (loss) income attributable to non-controlling interest, continuing operations. There are no consolidated funds as of June 30, 2023. See Note 2 - Summary of Significant Accounting Policies for additional details. Investments The Company owns 1,532,519 shares of GECC (approximately 20.2 % of the outstanding shares). Certain officers and directors of GECC are also officers and directors of GEG. Matthew A. Drapkin is a director of our Board of Directors and also the Chairman of GECC's Board of Directors, Adam M. Kleinman is our President, as well as the Chief Compliance Officer of GECC, and Keri A. Davis is our Chief Financial Officer, as well as the Chief Financial Officer of GECC. 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 8 - Fair Value Measurements. 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. 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 years ended June 30, 2023 and 2022 such costs were $ 1.5 million and $ 1.1 million, respectively. Other costs include operational or administrative services performed on behalf of the funds managed by GECM and are included in receivables from managed funds in the consolidated balance sheets. As of June 30, 2023 and 2022, costs of $ 0.1 million and $ 0.1 million related to the shared services agreements were included in receivables from managed funds, respectively. F- 21 On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC. The agreement included a retainer fee of $ 0.1 million which was paid in October 2021. In addition, the agreement included a success-based fee upon a sale of HC LLC. Upon completion of the Sale of HC LLC on January 3, 2023, a success fee of $ 0.7 million was paid to Imperial Capital, LLC. Jason W. Reese is the Co-Founder of Imperial Capital, LLC. Additionally, the Company received dividends of $ 0.4 million and realized gain of $ 0.3 million on its investment in Monomoy Properties, LLC, which it held for a portion of the year ended June 30, 2022. Monomoy Properties, LLC is managed by ICAM. See Note 3 - Forest Note and Transactions with JPM for details on the Forest Note and Investment in Forest, Note 5 - Acquisitions for details on the contingent consideration payable to ICAM following the acquisition of the Monomoy UpREIT investment management agreement, and Note 14 - Convertible Notes for details on the Convertible Notes issued to related parties. 8. 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. 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: ▪ Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. ▪ Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. ▪ Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. 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 no n-recurring basis are summarized in the tables below: Fair Value as of June 30, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets: Equity investments $ 14,296 $ - $ - $ 14,296 Total assets within the fair value hierarchy $ 14,296 $ - $ - $ 14,296 Investments valued at net asset value $ 18,315 Total assets $ 32,611 Liabilities: Contingent consideration liability $ - $ - $ 1,903 $ 1,903 Total liabilities $ - $ - $ 1,903 $ 1,903 F- 22 Fair Value as of June 30, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets: Equity investments $ 27,678 $ - $ - $ 27,678 Equity investments of Consolidated Fund 1,797 - - 1,797 Total assets within the fair value hierarchy $ 29,475 $ - $ - $ 29,475 Investments valued at net asset value $ 20,364 Total assets $ 49,839 Liabilities: Contingent consideration liability $ - $ - $ 1,120 $ 1,120 Total liabilities $ - $ - $ 1,120 $ 1,120 There were no transfers between levels of the fair value hierarchy during the years ended June 3 0 , 2023 and 2 0 22 . The following is a reconciliation of changes in contingent consideration, a Level 3 liability: For the twelve months ended June 30, (in thousands) 2023 2022 Beginning balance $ 1,120 $ - Additions - 1,120 Change in fair value 783 - Ending balance $ 1,903 $ 1,120 The valuation techniques applied to investments held by the Company and by the Consolidated Fund vary depending on the nature of the investment. Equity and equity-related securities Securities traded on a national securities exchanges are stated at the close price on the valuation date. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level 1. Investments in private funds The Company values investments in private funds using NAV as reported by each fund’s investment manager. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy. As of June 30, 2023, investments in private funds primarily consisted of our investment in Monomoy UpREIT and GEOF Series D. As of June 30, 2022 , investments in private funds primarily consisted of our investment in Monomoy UpREIT. Monomoy UpREIT allows redemptions annually with 90 days’ notice, subject to a one-year lockup from the date of initial investment, which are capped at 5 % of its NAV. GEOF Series D allows withdrawals annually and there is no set duration for the private fund. As of June 30, 2023, there were no unfunded commitments. See Note 5 - Acquisitions for additional discussion related to the fair value of the contingent consideration payable in conjunction with the acquisition of the Monomoy UpREIT investment management agreement and Note 13 - Related Party Notes Payable and 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. F- 23 9. Identifiable Intangible Assets, Net The following table is a summary of the Company’s intangible assets as of June 30, 2023 and 2022: As of June 30, 2023 As of June 30, 2022 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Investment management agreements $ 15,264 $ ( 3,792 ) $ 11,472 $ 15,264 $ ( 2,753 ) $ 12,511 Assembled workforce 1,103 ( 460 ) 643 1,103 ( 364 ) 739 Identifiable intangible assets, net $ 16,367 $ ( 4,252 ) $ 12,115 $ 16,367 $ ( 3,117 ) $ 13,250 During the years ended June 30, 2023 and 2022, the Company recorded amortization expense of $ 1.1 million and $ 0.5 million , respectively, within depreciation and amortization on the consolidated statements of operations. The following table provides the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter: (in thousands) Estimated Future Amortization Expense For the year ending June 30, 2024 $ 1,079 For the year ending June 30, 2025 1,033 For the year ending June 30, 2026 993 For the year ending June 30, 2027 958 For the year ending June 30, 2028 930 Thereafter 7,122 Total $ 12,115 10. Real Estate Under Development In January 2023, MBTS completed purchases of certain land parcels. 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. The Company intends to sell the land and improvements with the attached leases at or close to the respective lease commencement date. During the year ended June 30, 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. 11. Leases The Company leases office spaces in Waltham, Massachusetts, and Charleston, South Carolina, under operating leases. The following table summarizes operating and variable lease cost and cash paid for amounts included in the measurement of lease liabilities for the years ended June 30, 2023 and 2022: For the twelve months ended June 30, (in thousands) 2023 2022 Operating lease cost $ 391 $ 339 Variable lease cost 73 20 Cash paid for operating leases 468 332 F- 24 The following table provides details on the leases presented in the consolidated balance sheets as of June 30, 2023 and 2022: June 30, 2023 June 30, 2022 Weighted-average remaining life 1.5 years 2.3 years Weighted-average discount rate 9.4 % 9.7 % The following table provides a maturity analysis of the Company's operating lease liabilities as of June 30, 2023: (in thousands) June 30, 2023 For the year ending June 30, 2024 $ 429 For the year ending June 30, 2025 115 For the year ending June 30, 2026 9 Thereafter - Total lease payments $ 553 Imputed interest ( 52 ) Total lease liabilities $ 501 The Company’s office leases in Waltham, Massachusetts, and Charleston, South Carolina, provide a five-year and a three-year optional extension periods, respectively. As the Company is not reasonably certain to exercise the options, the periods covered by the options are not included in the respective lease terms or the measurement of the respective lease liabilities. 12. Accrued Expenses and Other Current Liabilities As of June 30, 2023 and 2022, accrued expenses and other current liabilities consisted of the following: (in thousands) June 30, 2023 June 30, 2022 Payroll and other employee-related costs $ 2,428 $ 1,570 Estimated future distributions to non-controlling interests in HC LLC 1,206 - Professional fees 1,036 1,396 Estimated working capital adjustment 288 Severance 208 - Taxes 159 - Interest 11 854 Other 82 25 Accrued expenses and other current liabilities $ 5,418 $ 3,845 See Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations for additional information on the estimated future distributions of proceeds to non-controlling interests in HC LLC, as well as the estimated working capital adjustment. 13. Related Party Notes Payable and Long-Term Debt As of June 30, 2023 , the Company did no t have any outstanding related party notes payable. As of June 30, 2022 , related party notes payable consisted of the Seller Note (as defined below) with a total principal and outstanding amount of $ 6.3 million recorded within related party notes payable, net of current portion, on the consolidated balance sheet. The Company’s long-term debt is summarized in the following table: (in thousands) Borrower June 30, 2023 June 30, 2022 GEGGL Notes GEG $ 26,945 $ 26,945 Total principal $ 26,945 $ 26,945 Unamortized debt discounts and issuance costs ( 1,137 ) ( 1,413 ) Long-term debt 25,808 25,532 F- 25 During the years ended June 30, 2023 and 2022, the Company incurred interest expense of $ 2.5 million and $ 0.2 million , respectively, on related-party notes payable and long-term debt. See Note 14 - Convertible Notes for interest expense on the Convertible Notes and Note 15 - Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries for interest expense on the preferred stock of subsidiaries. Additional details of each borrowing are discussed below. Seller Note On May 4, 2022 as part of the consideration paid to acquire the Monomoy UpREIT investment management agreement, GECM issued ICAM a $ 6.3 million promissory note (the Seller Note ). The Seller Note was due on August 4, 2023 and had no prepayment penalties. The Seller Note bore interest of 6.5 % per annum, which was paid quarterly. In August and December 2022, the Company settled the principal amount of $ 0.6 million and $ 2.0 million by transferring 50,000 and 200,000 shares of GECC stock, respectively. In February 2023, the Company repaid the remaining principal of $ 3.7 million in full. GEGGL Notes On June 9, 2022, the Company issued $ 26.9 million in aggregate principal amount of 7.25 % notes due on June 30, 2027 (the GEGGL Notes ), which included $ 1.9 million of GEGGL Notes issued in connection with the partial exercise of the underwriters’ over-allotment option. The GEGGL Notes are unsecured obligations and rank: (i) pari passu, or equal, with the Convertible Notes and any future outstanding unsecured unsubordinated indebtedness of the Company; (ii) senior to any of the Company's indebtedness that expressly provides it is subordinated to the GEGGL Notes; (iii) effectively subordinated to any future secured indebtedness of the Company; and (iv) structurally subordinated to any future indebtedness and other obligations of any of the Company's current and future subsidiaries. The Company pays interest on the GEGGL Notes on March 31, June 30, September 30 and December 31 of each year. The GEGGL Notes can be called on, or after, June 30, 2024. Holders of the GEGGL Notes do not have the option to have the notes repaid prior to the stated maturity date. The GEGGL Notes were issued in minimum denominations of $ 25 and integral multiples of $ 25 in excess thereof. 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 2 :1. As of June 30, 2023 our net consolidated debt to equity ratio is 0.07 :1.00. 14. Convertible Notes On February 26, 2020, the Company issued notes at par with an aggregate principal balance of $ 30 million due on February 26, 2030 that accrue interest at 5.0 % per annum, payable semiannually in arrears on June 30 and December 31, commencing June 30, 2020, in cash or in-kind at the option of the Company , with each $1,000 principal amount convertible into 288.0018 shares of the Company’s common stock, subject to the terms therein, prior to maturity at the option of the holder (the Convertible Notes ). In addition, on March 10, 2021, the Company issued additional Convertible Notes in an aggregate principal amount of $ 2.3 million. As of June 30, 2023, the total principal balance of Convertible Notes outstanding was $ 37.9 million , including cumulative interest paid in-kind. The Convertible Notes are held by a consortium of investors, including $ 15.4 million issued to certain related parties. As of June 30, 2023, such Convertible Notes issued to related parties include: ▪ $ 7.1 million issued to entities associated with Matthew A. Drapkin, including funds managed by Northern Right Capital Management, L.P. ( Northern Right ), a significant shareholder. Mr. Drapkin, a member of the Company’s Board of Directors, is the Chief Executive Officer of Northern Right. ▪ $ 7.5 million issued to entities associated with Jason W. Reese, including funds managed by ICAM, a significant shareholder. ▪ $ 0.8 million issued to entities associated with Eric J. Scheyer, a member of the Company’s Board of Directors. F- 26 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 $ 1.2 million in issuance costs on the original issuance that are amortized over the 10-year term. Convertible Notes recorded on the Company's consolidated balance sheets as of June 30, 2023 and 2022 are summarized in the following table: (in thousands) June 30, 2023 June 30, 2022 Convertible Notes principal $ 37,912 $ 36,085 Unamortized debt issuance costs ( 783 ) ( 898 ) Convertible Notes 37,129 35,187 The Company incurred interest expense of $ 1.9 million and $ 1.8 million related to the Convertible Notes for the years ended June 30, 2023 and 2022, respectively, inclusive of non-cash interest related to amortization of debt issuance costs. Interest was paid in-kind by issuing $ 1.8 million and $ 1.7 million of additional Convertible Notes to holders for the years ended June 30, 2023 and 2022 , respectively. 15. Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries Non-Controlling Interests Holders of non-controlling interests in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity, or permanent equity. The following table summarizes the non-controlling interest balances on the consolidated balance sheets: (in thousands) June 30, 2023 June 30, 2022 HC LLC Temporary equity - 2,225 Permanent equity - 2,225 Total HC LLC - 4,450 Consolidated Fund Permanent equity - 642 Forest Permanent equity - 3,666 Total non-controlling interests $ - $ 8,758 The following table summarizes the net income (loss) attributable to the non-controlling interests on the consolidated statements of operations: For the twelve months ended June 30, (in thousands) 2023 2022 HC LLC Temporary equity 752 ( 414 ) Permanent equity 752 ( 414 ) Total HC LLC 1,504 ( 828 ) GEC GP Permanent equity - ( 6 ) Consolidated Fund Permanent equity ( 8 ) ( 215 ) Forest Permanent equity ( 1,546 ) 905 Net loss attributable to non-controlling interest $ ( 50 ) $ ( 144 ) F- 27 HC LLC – Non-controlling interest classified as temporary equity The Company issued a 9.95 % common stock equity ownership in HC LLC. The holder of the interest had board observer rights for the HC LLC board of directors, but no voting rights. HC LLC had the right of first offer if the holder desired to sell the security and in the event of a sale of HC LLC, the holder was obligated to sell their securities (drag along rights) and had the right to participate in sales of HC LLC securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder owned at least 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of HC LLC had not commenced and (iii) the holder had not had an earlier opportunity to sell its shares at their fair market value, the holder had the right to request a marketing process for a sale of HC LLC and had the right to put its common shares to HC LLC at the price for such shares implied by such marketing process. The Company also had the right to call the holder’s common shares at such price. The holder of the non-controlling interest was entitled to participate in earnings of HC LLC and was not required to fund losses. As the redemption was contingent upon future events outside of the Company’s control which were not probable, the Company classified the non-controlling interest as temporary equity at its fair value on the date of issuance, adjusted for any earnings in HC LLC. As of June 30, 2023 , no non-controlling interest was outstanding following the Sale of HC LLC on January 3, 2023. Refer to Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations for details on the Sale of HC LLC to Quipt. HC LLC – Non-controlling interest classified as permanent equity The Company issued a 9.95 % common stock equity ownership in HC LLC. The rights were consistent with the non-controlling interest classified as temporary equity, other than the holder not having a contingent put right. Accordingly, the Company classified the non-controlling interest as permanent equity at its fair value on the date of issuance, adjusted for any earnings in HC LLC. As of June 30, 2023 , no non-controlling interest was outstanding following the Sale of HC LLC on January 3, 2023. Refer to Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations for details on the Sale of HC LLC to Quipt. GEC GP – Non-controlling interest classified as permanent equity GEC GP owned the rights to the profit sharing agreement with GECM as well as an intercompany obligation under a senior secured note payable issued by Great Elm GECC GP Corp in consideration for the assets acquired from MAST Capital Management, LLC. During the year ended June 30, 2022, the Company purchased the remaining shares of GEC GP. As of June 30, 2023 , no non-controlling interest was outstanding. Consolidated Fund – Non-controlling interest classified as permanent equity As of June 30, 2022, the Company held 73.4 % of the capital in the Consolidated Fund and the remaining capital was recorded as a non-controlling interest that included affiliated individuals and entities. In July 2022, the Consolidated Fund began to wind down and distributed its remaining assets to non-controlling interests in the total amount of $ 0.6 million. Forest – Non-controlling interest classified as permanent equity In December 2020, the Company sold to JPM a 20.0 % common stock interest in Forest in exchange for $ 2.7 million. As of June 30, 2023 , no non-controlling interest was outstanding following the Sale of Controlling Interest in Forest on December 30, 2022. See Note 3 - Forest Note and Transactions with JPM. Redeemable Preferred Stock of Subsidiaries Forest Preferred Stock classified as a liability On December 29, 2020, Forest issued 35,010 shares of preferred stock in Forest with a face value of $ 1,000 per share at issuance ( Forest Preferred Stock ). The preferred shares provided for a 9 % annual dividend, which was payable quarterly. As the preferred shares were mandatorily redeemable by the Company at their face value of $ 1,000 per share on December 29, 2027 , or at a 0 - 3 % premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027, the security was classified as a liability in the consolidated balance sheet as of June 30, 2022. Following the Sale of Controlling Interest in Forest on December 30, 2022, there was no outstanding balance in respect to Forest Preferred Stock. See Note 3 - Forest Note and Transactions with JPM. F- 28 The dividends on Forest Preferred Stock were included in interest expense in the consolidated statements of operations. During the years ended June 30, 2023 and 2022, the Company recorded interest expense, inclusive of non-cash interest related to amortization of discounts and debt issuance costs, of $ 1.7 million and $ 3.5 million , respectively, related to Forest Preferred Stock. 16. Share-Based and Other Non-Cash Compensation Tax Benefits Preservation Agreement On December 29, 2020, the Board of Directors of the Company adopted a Tax Benefits Preservation Agreement, between the Company and Computershare Trust Company, N.A., as Rights Agent (the Rights Plan ). The Rights Plan is designed to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, by restricting the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 4.99 % or more of the Company’s common stock and the ability of persons or entities now owning 5 % or more of the outstanding common shares from acquiring additional common shares. Pursuant to the terms of the Rights Plan, the Company’s Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (a Tax Right ) for each outstanding share of common stock, par value $ 0.001 per share of the Company (the Common Stock ), to stockholders of record as of the close of business on January 29, 2018 (the Record Date ). In addition, one Tax Right will automatically attach to each share of Common Stock issued between the Record Date and the Distribution Date (as defined in the Rights Plan). Each Tax Right entitles the registered holder thereof to purchase from the Company a unit consisting of one ten -thousandth of a share (a Unit ) of Series A Junior Participating Cumulative Preferred Stock, par value $ 0.001 per share, of the Company at a cash exercise price of $ 15.00 per Unit (the Exercise Price ), subject to adjustment, under the conditions specified in the Rights Plan. The Tax Rights are not exercisable until the Distribution Date and will expire at the earlier of (a) January 29, 2028; (b) the time when the Tax Rights are redeemed as provided therein; (c) the time when the Rights are exchanged as provided therein; (d) the repeal of Section 382 of the Code if the Independent Directors (as defined in the Rights Plan) determine that the Rights Plan is no longer necessary for the preservation of Tax Benefits (as defined in the Rights Planet); (e) the beginning of the taxable year of the Company to which the Company’s Board of Directors determines that no Tax Benefits may be carried forward, unless previously redeemed or exchanged by the Company. Stock Plans In November 2013, the Company’s stockholders approved the Amended and Restated 1999 Directors’ Equity Compensation Plan (the Directors’ Plan ). Options and awards granted to new or existing Outside Directors (as defined in the Directors’ Plan) under the Directors’ Plan vest ratably over a period of one to three years . The Directors’ Plan also provides for the acceleration of options upon the dismissal of an Outside Director from the Board of Directors of the Company upon or within 24 months following a change in control of the Company. The exercise price of options granted under the Directors’ Plan is equal to the fair market value of the Company’s common stock on the date of grant. Under the Directors’ Plan, stock option grants have a term of ten years . As of June 30, 2023 , the Company had no shares outstanding under the Directors’ Plan. In June 2016, the Company’s stockholders approved the Great Elm Group, Inc. 2016 Long-Term Incentive Plan (the 2016 Long-Term Incentive Plan ), as subsequently amended, and the Great Elm Group, Inc. 2016 Employee Stock Purchase Plan (the 2016 Employee Stock Purchase Plan ). In November 2022, the Company’s stockholders approved an increase to the number of shares available for issuance under the 2016 Long-Term Incentive Plan by 2,900,000 shares. The 2016 Long-Term Incentive Plan is administered by the Compensation Committee of the Board of Directors (the Compensation Committee ) and provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, cash-based awards and other stock-based awards. As of June 30, 2023, the Company had a total of 4,392,713 shares outstanding under the 2016 Long-Term Incentive Plan and no shares were outstanding under the 2016 Employee Stock Purchase Plan. F- 29 The following table summarizes the number of common shares available for future issuance under the plans discussed above as of June 30, 2023: Shares of Common Stock Available for Future Issuance Shares Directors' Plan 26,166 2016 Long-Term Incentive Plan 2,435,038 2016 Employee Stock Purchase Plan 944,000 Total 3,405,204 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 year ended June 30, 2023: Restricted Stock Awards and Restricted Stock Units Shares (in thousands) Weighted Average Grant Date Fair Value Outstanding at June 30, 2022 1,312 $ 1.79 Granted 1,007 2.20 Vested ( 981 ) 2.01 Forfeited ( 16 ) 2.62 Outstanding at June 30, 2023 1,322 $ 1.93 Restricted stock awards and restricted stock units have vesting terms between 1 - 4 years and are subject to service requirements. During the year ended June 30, 2023, the Company granted 1,006,825 restricted stock awards and did no t grant any restricted stock units. The aggregate grant date fair value of restricted stock awards and restricted stock units granted during the years ended June 30, 2023 and 2022 was $ 2.2 million and $ 3.1 million, respectively. For the years ended June 30, 2023 and 2022, the total intrinsic value of restricted stock vested was $ 2.0 million and $ 2.2 million, respectively. Stock Options The following table presents activity related to the Company’s stock options for the year ended June 30, 2023: Stock Options Shares (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2022 2,134 $ 3.68 3.34 $ - Options granted 2,125 2.14 - - Forfeited, cancelled or expired ( 995 ) 3.63 - - Outstanding at June 30, 2023 3,264 $ 2.70 7.45 $ - Exercisable at June 30, 2023 1,252 $ 3.72 3.65 $ - The weighted average grant date fair value of options, per share, granted during the years ended June 30, 2023 and 2022 was $ 0.23 and $ 1.02 , respectively. The ranges of assumptions used to value options granted were as follows: As of June 30, 2023 2022 Expected volatility 30.0 % - 70.5 % 69.80 % Expected dividends - - Expected term (years) 2.50 - 5.00 3.25 Risk-free rate 3.4 % - 3.9 % 0.60 % F- 30 Stock-Based Compensation Expense Stock-based compensation expense related to all restricted stock awards, restricted stock units, and stock options totaled $ 2.6 million and $ 2.8 million for the years ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and 2022, the Company had unrecognized compensation cost related to all unvested restricted stock awards, restricted stock units, and stock options totaling $ 2.3 million and $ 2.3 million, respectively, expected to be recognized as the awards and options vest over the next 1.7 years. In November 2021, the Compensation Committee in its discretion determined that an aggregate of 580,023 performance shares previously awarded to certain employees had vested. These restricted stock awards granted had both performance and service requirements in connection with the formation of the investment management business. The vesting of these awards was subject to a five-year service requirement and an investment management cumulative revenue collection target of $ 40 million for the five-year period ended November 3, 2021. The discretionary vesting of shares, as determined by the Compensation Committee resulted in a charge to stock-based compensation expense of $ 0.6 million during the year ended June 30, 2022. 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 3 years from the original grant date of such compensation, termination of service, or death, and is payable in common stock shares. As of June 30, 2023, there were 167,939 restricted stock awards and restricted stock units that were deferred under this plan (and thus included in the number of restricted stock awards and restricted stock units outstanding as of that date), including 57,931 restricted stock awards, for which the service condition was met during the twelve months ended June 30, 2023. Other Non-Cash Compensation During the year ended June 30, 2023, 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 year ended June 30, 2023 was $ 0.4 million, of which $ 0.1 million vested immediately, and the balance will vest annually pro-rata over a three year period. Related compensation expense was $ 0.3 million for the year ended June 30, 2023. During the year ended June 30, 2023, the Company issued compensation to certain employees in the form of restricted membership interest rights in MP II to be settled with the membership interest currently held by the Company. The total value of the MP II restricted membership interests awarded for the year ended June 30, 2023 was $ 0.1 million, which will vest on the third anniversary of the grant date. Related compensation expense was $ 22 thousand for the year ended June 30, 2023 . 17. Income Taxes The Company had income (loss) before income taxes from continuing operations of $ 14.7 million and $( 19.2 ) million , respectively, for the years ended June 30, 2023 and 2022. There was no foreign activity during these years. The provision for income taxes includes the following: For the years ended June 30, (in thousands) 2023 2022 Current $ 200 $ 83 Deferred - - Income tax expense $ 200 $ 83 The Company recognized an income tax expense from continuing operations of $ 0.2 million and $ 0.1 million for the years ended June 30, 2023 and 2022 , respectively. This expense consisted solely of state and local taxes. No federal income taxes were incurred for the years ended June 30, 2023 and 2022. F- 31 The following table reconciles the expected corporate federal income tax expense, computed by multiplying the Company's income (loss) before income taxes by the statutory tax rate of 21 %, to the total tax expense. For the years ended June 30, (in thousands) 2023 2022 Federal tax expense (benefit) at statutory rate $ 3,083 $ ( 4,037 ) State taxes net of federal impact ( 85 ) ( 507 ) Sale of Controlling Interest in Forest 4,598 - Change in valuation allowance ( 192,363 ) ( 26,165 ) Adjustment to prior years 557 108 Interest expense on Forest Preferred Stock 328 700 Net operating loss and credit expirations 184,011 30,059 Other 71 ( 75 ) Income tax expense $ 200 $ 83 The tax effect of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows: As of June 30, (in thousands) 2023 2022 Deferred Tax Assets: Net operating loss carryforwards $ 5,019 $ 190,535 Accruals and allowances not deductible for tax purposes 615 1,646 Identifiable intangible assets 343 13 Unrealized loss on investments 2,969 5,361 Investment in partnerships 2,856 10,464 Other 1,091 2,169 Total deferred tax assets, gross $ 12,893 $ 210,188 Less: valuation allowance $ ( 12,057 ) $ ( 207,085 ) Total deferred tax assets, net $ 836 $ 3,103 Deferred Tax Liabilities: Goodwill $ - $ ( 2,225 ) Other ( 836 ) ( 1,164 ) Total deferred tax liabilities $ ( 836 ) $ ( 3,389 ) Total deferred tax liabilities, net $ - $ ( 286 ) In light of the history of cumulative operating losses, the Company recorded a valuation allowance for all of its federal and state deferred tax assets, as it is presently unable to conclude that it is more likely than not that the federal and state deferred tax assets in excess of deferred tax liabilities will be realized. The decrease of $ 195.0 million in the overall valuation allowance relates primarily to the expiration of federal tax attributes, as well as the Sale of Controlling Interest in Forest and Sale of HC LLC. As of June 30, 2023, the Company had net operating loss ( NOL ) carryforwards for federal income tax purposes of approximately $ 16.2 million , of which approximately $ 8.2 million will expire in fiscal years 2024 through 2025 and $ 8.0 million can be carried forward indefinitely. As of June 30, 2023, the Company also had $ 25.5 million of state NOL carryforwards, principally in Massachusetts, Arizona, and Nebraska, that will expire from 2031 to 2043 . The utilization of a corporation's NOL carryforwards is limited following a change in ownership (as defined by Internal Revenue Code section 382) of greater than 50 % within a rolling three-year period. If it is determined that prior equity transactions limit the Company's NOL carryforwards, the annual limitation will be determined by multiplying the market value of the Company on the date of the ownership change by the federal long-term tax-exempt rate. Any amount exceeding the annual limitation may be carried forward to future years for the balance of the NOL carryforward period. F- 32 During the years ended June 30, 2023 and 2022, the total amount of gross unrecognized tax benefit activity was as follows: (in thousands) Balance as of June 30, 2021 $ 36,019 Addition for tax positions of prior years 509 Reductions for tax positions of prior years ( 71 ) Lapse of statute of limitations ( 4,127 ) Balance as of June 30, 2022 $ 32,330 Reductions for tax positions of prior years ( 27,706 ) Lapse of statute of limitations ( 4,116 ) Balance as of June 30, 2023 $ 508 As of June 30, 2023 and 2022, the Company had approximately $ 0.5 million and $ 32.3 million , respectively, of unrecognized tax benefits. The reduction for tax positions of prior years of $ 27.7 million was attributable to unrecognized tax benefits of Forest that was sold during the year ended June 30, 2023, as discussed in Note 3 - Forest Note and Transactions with JPM. These unrecognized tax benefits, if recognized, would ordinarily impact the effective tax rate by a corresponding amount. However, because of the Company’s history of cumulative operating losses, any recognized tax benefits would be fully offset by a valuation allowance without any impact on our consolidated results. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in tax expense on the Company’s consolidated statements of operations. As of June 30, 2023 and 2022, the accrual for interest and penalties associated with tax liabilities was immaterial. Although timing of the resolution and/or closure on the Company's unrecognized tax benefits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months. The Company files U.S. federal and U.S. state tax returns in several states. Tax years remain open to examination to the extent that NOLs generated in those years are utilized in a later year. Accordingly, the Company's fiscal years 2004, 2005, 2018 , and 2020 through 2023 remain open to examination by federal tax authorities. State tax returns generally remain open to examination for fiscal years 2017 through 2023 . 18. 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 pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows. F- 33