Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2023

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes that are normally included in the Company’s Form 10-K and should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations.

Previously reported assets and liabilities related to our Durable Medical Equipment (DME) Business, primarily consisting of HC LLC and its subsidiaries, have been reclassified as assets and liabilities held for sale on the Company's consolidated balance sheet as of June 30, 2022. In addition, the historical results of the DME Business and related activity have been presented in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and 2022 as discontinued operations. See Note 4 – Assets and Liabilities Held for Sale and Discontinued Operations.

Use of Estimates

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Included in these estimates and assumptions are items that relate to revenue recognition, impairment of long lived tangible and intangible assets, valuation allowance for deferred tax assets, fair value measurements including stock-based compensation and contingent consideration, and the value of lease liabilities and corresponding right of use assets. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

Principles of Consolidation

The Company consolidates the assets, liabilities, and operating results of its wholly-owned and majority-owned subsidiaries, as well as 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 we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE. All intercompany accounts and transactions have been eliminated in consolidation.

Non-controlling interests in the Company’s subsidiaries are reported as a component of liabilities for mandatorily redeemable interests, temporary equity for contingently redeemable interests or permanent equity, separate from the Company’s equity. See Note 11 – Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries. Results of operations attributable to the non-controlling interests are included in the Company’s condensed 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.

Real Estate under Development

Real estate under development is classified as follows: (i) real estate under development (current), which includes real estate projects that are in the process of being developed and expected to be completed and disposed of within one year of the balance sheet date; (ii) real estate under development (non-current), which includes real estate projects that are in the process of being developed and expected to be completed and disposed of more than one year from the balance sheet date; and (iii) real estate held for sale, which includes land and completed improvements thereon that meet all of the “held for sale” criteria.

Real estate under development is carried at cost less impairment, if applicable. We capitalize costs that are directly identifiable with the specific real estate projects, including pre-acquisition and pre-construction costs, development and construction costs, taxes, and insurance. We do not capitalize any general and administrative or overhead costs, regardless of whether the costs are internal or paid to third parties. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for occupancy.

Real estate under development is evaluated for impairment and 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.

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.

Earnings per Share

The following table presents the calculation of basic and diluted income (loss) per share:


	For the three months ended March 31,						For the nine months ended March 31,
(in thousands except per share amounts)	2023			2022			2023			2022
Numerator:
Net (loss) income from continuing operations	$	(455	)	$	(6,467	)	$	19,735		$	(14,006	)
Less: net income (loss) attributable to non-controlling interest, continuing operations		-			1,146			(1,554	)		913
Numerator for basic EPS - Net (loss) income from continuing operations attributable to Great Elm Group, Inc.	$	(455	)	$	(7,613	)	$	21,289		$	(14,919	)

Net income from discontinued operations		12,203			332			13,202			3,818
Less: net (loss) income attributable to non-controlling interest, discontinued operations		-			(1,372	)		1,504			(754	)
Numerator for basic EPS - Net (loss) income from discontinued operations, attributable to Great Elm Group, Inc.	$	12,203		$	1,704		$	11,698		$	4,572

Effect of dilutive securities:
Interest expense associated with Convertible Notes, continuing operations	$	-		$	-		$	1,451		$	-
Numerator for diluted EPS - Net (loss) income from continuing operations attributable to Great Elm Group, Inc., after the effect of dilutive securities	$	(455	)	$	(7,613	)	$	22,740		$	(14,919	)

Numerator for diluted EPS - Net (loss) income from discontinued operations, attributable to Great Elm Group, Inc.	$	12,203		$	1,704		$	11,698		$	4,572

Denominator:
Denominator for basic EPS - Weighted average shares of common stock outstanding		28,997			26,842			28,779			26,963

Effect of dilutive securities:
Restricted stock		-			-			1,328			-
Convertible Notes		-			-			10,566			-
Denominator for diluted EPS - Weighted average shares of common stock outstanding after the effect of dilutive securities		28,997			26,842			40,673			26,963

Basic income (loss) per share from:
Continuing operations	$	(0.02	)	$	(0.28	)	$	0.74		$	(0.55	)
Discontinued operations		0.42			0.06			0.41			0.17
Basic net income (loss) per share	$	0.40		$	(0.22	)	$	1.15		$	(0.38	)
Diluted income (loss) per share from:
Continuing operations	$	(0.02	)	$	(0.28	)	$	0.56		$	(0.55	)
Discontinued operations		0.42			0.06		$	0.29			0.17
Diluted net income (loss) per share	$	0.40		$	(0.22	)	$	0.85		$	(0.38	)

As of March 31, 2023, the Company had 1,270,651 potential shares of common stock issuable upon the exercise of stock options that are not included in the diluted income (loss) per share calculation because to do so would be anti-dilutive for both the three and nine months ended March 31, 2023. As of March 31, 2023, the Company had 10,652,034 potential shares of common stock issuable upon the conversion of Convertible Notes (as defined below) and 1,522,443 potential shares issuable upon vesting of restricted stock units and restricted stock awards that are not included in the diluted income (loss) per share calculation for the three months ended March 31, 2023 because to do so would be anti-dilutive.

As of March 31, 2022, the Company had 10,139,031 potential shares of common stock issuable upon the conversion of Convertible Notes and 3,159,856 potential shares issuable upon the exercise of stock options and vesting of restricted stock units and restricted stock awards that are not included in the diluted income (loss) per share calculation because to do so would be anti-dilutive.

As of March 31, 2023 and 2022, the Company had an aggregate of 1,509,885 and 579,423 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.

Recently Issued Accounting Standards

Current Expected Credit Losses. In June 2016, the Financial Accounting Standards Board (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 is evaluating the potential impact that the adoption of these ASUs will have on its consolidated financial statements.