UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended DecemberMarch 31, 20202023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39832

Great Elm Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

85-3622015

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

800 South Street, Suite 230, WalthamMA

02453

(Address of principal executive offices)

(Zip Code)

(617) (617) 375-3006

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

GEG

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

7.25% Notes due 2027

GEGGL

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of February 9, 2021,April 27, 2023, there were 26,473,09930,643,918 shares of the registrant’s common stock outstanding.


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

23

Unaudited Condensed Consolidated Balance Sheets as of DecemberMarch 31, 20202023 and June 30, 20202022

3

Unaudited Condensed Consolidated Statements of Operations for the three and sixnine months ended DecemberMarch 31, 20202023 and 20192022

4

Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three and six months ended March 31, 2023, December 31, 20202022, and September 30, 2022

5

Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three and six months ended March 31, 2022, December 31, 20192021, and September 30, 2021

6

Unaudited Condensed Consolidated Statements of Cash Flows for the sixnine months ended DecemberMarch 31, 20202023 and 20192022

7

Unaudited Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

4028

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

5032

Item 4.

Controls and Procedures

5132

PART II. OTHER INFORMATION

5132

Item 1.

Legal Proceedings

5132

Item 1A.

Risk Factors

5133

Item 2.6.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

5233

SIGNATURES

5334

Unless the context otherwise requires, “we”, “us”, “our”, “GEG”,“we,” “us,” “our,” “GEG,” the “Company” and terms of similar import refer to Great Elm Group, Inc. and/or its subsidiaries. Our corporate website address is www.greatelmcap.com.www.greatelmgroup.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.

1


Cautionary Statement Regarding Forward-Looking Information

This report and certain information incorporated herein by reference, contain forward‑looking statements under the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward‑looking statements are reasonable, these assumptions and expectations may not prove to be correct and we may not achieve the financial results or benefits anticipated. These forward‑looking statements are not guarantees of actual results. Our actual results may differ materially from those suggested in the forward‑looking statements. These forward‑looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation:

the ability of Great Elm Capital Management, Inc. to profitably manage Great Elm Capital Corp. (NASDAQ: GECC), a business development company that we manage through our investment management business, and Monomoy Properties UpREIT, LLC (Monomoy UpREIT), the operating subsidiary of a private real estate investment trust with a portfolio of diversified net leased industrial assets that we manage through our investment management business;
the dividend rate that GECC and Monomoy UpREIT will pay;
the results of our investment management business;
our ability to sell the real estate properties we develop at a profit;
our ability to raise capital to fund our business plan;
our ability to make acquisitions and manage any businesses we may acquire;
conditions in the equity capital markets and debt capital markets as well as the economy generally, including rising interest rates and inflationary pressures;
our ability to maintain the security of electronic and other confidential information;
serious disruptions and catastrophic events, including the impact of the novel coronavirus (COVID‑19) pandemic or similar public health emergencies on the global economy;
the impact of on-going or worsening supply chain challenges;
competition, mostly from larger, well-financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds;
outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith;
maintaining our contractual arrangements and relationships with third parties;
our ability to attract, assimilate, develop and retain key personnel;
compliance with laws, regulations and orders;
changes in laws and regulations governing our operations; and
other factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 under “Risk Factors” or as set forth from time to time in our Securities and Exchange Commission filings.

the ability of Great Elm Capital Management, Inc. (GECM) to profitably manage Great Elm Capital Corp. (NASDAQ: GECC), a business development company GECM manages through our investment management business;

the dividend rate that GECC will pay;

our ability to continue to develop and grow our durable medical equipment, investment management and real estate businesses;

our ability to raise capital to fund our business plan;

our ability to make acquisitions and manage any businesses we may acquire;

conditions in the equity capital markets and debt capital markets as well as the economy generally;

our ability to maintain the security of electronic and other confidential information;

serious disruptions and catastrophic events, including the impact of COVID‑19 on the global economy;

competition, mostly from larger, well-financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds;

outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith;

maintaining our contractual arrangements and relationships with third parties;

our ability to attract, assimilate and retain key personnel;

compliance with laws, regulations and orders;

changes in laws and regulations governing our operations; and

other factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 under “Risk Factors” or as set forth from time to time in our Securities and Exchange Commission (SEC) filings.

These forward‑looking statements speak only as of the time of filing of this report and we do not undertake to update or revise them as more information becomes available. You are cautioned not to place undue reliance on these forward‑looking statements. We do not undertake any obligation to release publicly any revisions to these forward‑looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

2


Great Elm Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Dollar amounts in thousands (except per share data)

ASSETS

 

December 31, 2020

 

 

June 30, 2020

 

 

March 31, 2023

 

 

June 30, 2022

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,894

 

 

$

40,519

 

 

$

84,118

 

 

$

22,281

 

Restricted cash

 

 

934

 

 

 

846

 

Accounts receivable

 

 

7,597

 

 

 

7,991

 

Related party receivables

 

 

1,379

 

 

 

1,059

 

Investments, at fair value (cost $40,448 and $30,279, respectively)

 

 

19,532

 

 

 

8,705

 

Inventories

 

 

967

 

 

 

1,470

 

Receivables from managed funds

 

 

2,421

 

 

 

2,445

 

Investments, at fair value (cost $41,079 and $68,766, respectively)

 

 

35,104

 

 

 

48,042

 

Prepaid and other current assets

 

 

1,134

 

 

 

738

 

 

 

946

 

 

 

665

 

Assets of consolidated fund

 

 

 

 

 

 

 

 

Investments, at fair value (cost $3,351)

 

 

3,417

 

 

 

-

 

Assets of Consolidated Fund:

 

 

 

 

 

 

Investments, at fair value (cost $2,432)

 

 

-

 

 

 

1,797

 

Prepaid expenses

 

 

11

 

 

 

-

 

 

 

-

 

 

 

746

 

Real estate under development

 

 

1,683

 

 

 

-

 

Current assets held for sale

 

 

-

 

 

 

8,464

 

Total current assets

 

 

67,865

 

 

 

61,328

 

 

 

124,272

 

 

 

84,440

 

Real estate assets, net

 

 

52,576

 

 

 

53,188

 

Property and equipment, net

 

 

1,132

 

 

 

1,410

 

Equipment held for rental, net

 

 

7,020

 

 

 

7,483

 

Identifiable intangible assets, net

 

 

14,031

 

 

 

15,129

 

 

 

12,391

 

 

 

13,250

 

Goodwill

 

 

50,010

 

 

 

50,010

 

Right of use assets

 

 

5,015

 

 

 

5,392

 

 

 

582

 

 

 

733

 

Other assets

 

 

1,730

 

 

 

1,505

 

 

 

137

 

 

 

103

 

Non-current assets held for sale

 

 

-

 

 

 

69,561

 

Total assets

 

$

199,379

 

 

$

195,445

 

 

$

137,382

 

 

$

168,087

 

LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,159

 

 

$

5,007

 

 

$

307

 

 

$

8

 

Accrued expenses and other liabilities

 

 

4,040

 

 

 

3,565

 

 

 

4,122

 

 

 

3,845

 

Deferred revenue

 

 

5,372

 

 

 

5,652

 

Current portion of related party payables

 

 

855

 

 

 

486

 

Current portion of lease liabilities

 

 

1,518

 

 

 

1,617

 

 

 

347

 

 

 

341

 

Current portion of long term debt

 

 

2,413

 

 

 

6,221

 

Current portion of related party notes payable

 

 

76

 

 

 

1,418

 

Current portion of equipment financing debt

 

 

1,755

 

 

 

2,034

 

Liabilities of consolidated fund

 

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

357

 

 

 

-

 

Liabilities of Consolidated Fund - accrued expenses and other

 

 

-

 

 

 

11

 

Current liabilities held for sale

 

 

-

 

 

 

15,003

 

Total current liabilities

 

 

20,690

 

 

 

25,514

 

 

 

5,631

 

 

 

19,694

 

Lease liabilities, net of current portion

 

 

3,767

 

 

 

4,060

 

 

 

245

 

 

 

472

 

Long term debt, net of current portion

 

 

51,948

 

 

 

52,781

 

Long term debt (face value $26,945)

 

 

25,737

 

 

 

25,532

 

Related party payables

 

 

445

 

 

 

1,120

 

Related party notes payable, net of current portion

 

 

2,996

 

 

 

26,485

 

 

 

-

 

 

 

6,270

 

Convertible notes (face value $31,280 and $30,521, respectively, including $13,607 and $13,277, respectively, held by related parties)

 

 

18,584

 

 

 

17,444

 

Equipment financing debt, net of current portion

 

 

122

 

 

 

196

 

Redeemable preferred stock of subsidiaries (held by related parties, face value $37,018)

 

 

35,412

 

 

 

-

 

Convertible notes (face value $36,987 and $36,085, including $15,019 and $15,133 held by related parties, respectively)

 

 

36,176

 

 

 

35,187

 

Redeemable preferred stock of subsidiaries (held by related parties, face value $35,010)

 

 

-

 

 

 

34,099

 

Other liabilities

 

 

655

 

 

 

395

 

 

 

691

 

 

 

908

 

Non-current liabilities held for sale

 

 

-

 

 

 

2,551

 

Total liabilities

 

 

134,174

 

 

 

126,875

 

 

 

68,925

 

 

 

125,833

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

Contingently redeemable non-controlling interest

 

 

2,567

 

 

 

3,890

 

 

 

-

 

 

 

2,225

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 authorized and 0 outstanding

 

 

-

 

 

 

-

 

Common stock, $0.001 par value; 350,000,000 shares authorized and 26,423,677 shares issued and 25,690,768 outstanding at December 31, 2020; and 26,217,380 shares issued and 25,529,534 outstanding at June 30, 2020

 

 

26

 

 

 

26

 

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 30,598,911 shares issued and 29,146,053 outstanding at March 31, 2023; and 28,932,444 shares issued and 28,507,490 outstanding at June 30, 2022

 

 

29

 

 

 

29

 

Additional paid-in-capital

 

 

3,318,831

 

 

 

3,318,117

 

 

 

3,314,737

 

 

 

3,312,763

��

Accumulated deficit

 

 

(3,261,454

)

 

 

(3,257,349

)

 

 

(3,246,309

)

 

 

(3,279,296

)

Total Great Elm Group, Inc. stockholders' equity

 

 

57,403

 

 

 

60,794

 

 

 

68,457

 

 

 

33,496

 

Non-controlling interests

 

 

5,235

 

 

 

3,886

 

Non-controlling interest

 

 

-

 

 

 

6,533

 

Total stockholders' equity

 

 

62,638

 

 

 

64,680

 

 

 

68,457

 

 

 

40,029

 

Total liabilities, non-controlling interest and stockholders' equity

 

$

199,379

 

 

$

195,445

 

 

$

137,382

 

 

$

168,087

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Great Elm Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

Dollar amountsAmounts in thousands (except per share data)

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Durable medical equipment sales and services revenue

 

$

9,544

 

 

$

9,047

 

 

$

18,757

 

 

$

16,792

 

Durable medical equipment rental income

 

 

4,999

 

 

 

5,344

 

 

 

10,396

 

 

 

10,830

 

Investment management revenues

 

 

760

 

 

 

889

 

 

 

1,533

 

 

 

1,756

 

Real estate rental income

 

 

1,276

 

 

 

1,271

 

 

 

2,548

 

 

 

2,544

 

Total revenues

 

 

16,579

 

 

 

16,551

 

 

 

33,234

 

 

 

31,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

4,703

 

 

 

3,689

 

 

 

8,910

 

 

 

7,152

 

Cost of durable medical equipment rentals1

 

 

1,621

 

 

 

2,185

 

 

 

3,536

 

 

 

4,450

 

Durable medical equipment other operating expenses

 

 

8,070

 

 

 

7,679

 

 

 

15,750

 

 

 

14,528

 

Investment management expenses

 

 

916

 

 

 

664

 

 

 

1,642

 

 

 

1,355

 

Real estate expenses

 

 

127

 

 

 

126

 

 

 

252

 

 

 

250

 

Depreciation and amortization

 

 

1,021

 

 

 

1,130

 

 

 

2,042

 

 

 

2,197

 

Selling, general and administrative

 

 

1,315

 

 

 

1,348

 

 

 

2,728

 

 

 

3,134

 

Expenses of consolidated fund

 

 

8

 

 

 

-

 

 

 

8

 

 

 

-

 

Total operating costs and expenses

 

 

17,781

 

 

 

16,821

 

 

 

34,868

 

 

 

33,066

 

Operating loss

 

 

(1,202

)

 

 

(270

)

 

 

(1,634

)

 

 

(1,144

)

Dividends and interest income

 

 

1,325

 

 

 

603

 

 

 

1,854

 

 

 

1,117

 

Unrealized gain (loss) on investment in GECC

 

 

2,560

 

 

 

(826

)

 

 

658

 

 

 

(1,809

)

Net unrealized gain on investments of consolidated fund

 

 

66

 

 

 

-

 

 

 

66

 

 

 

-

 

Interest expense

 

 

(1,911

)

 

 

(1,633

)

 

 

(3,868

)

 

 

(3,329

)

Loss on extinguishment of debt

 

 

(1,866

)

 

 

-

 

 

 

(1,866

)

 

 

-

 

Other income, net

 

 

32

 

 

 

-

 

 

 

30

 

 

 

3

 

Loss, before income taxes

 

 

(996

)

 

 

(2,126

)

 

 

(4,760

)

 

 

(5,162

)

Income tax benefit (expense)

 

 

50

 

 

 

99

 

 

 

(49

)

 

 

(143

)

Net loss

 

$

(946

)

 

$

(2,027

)

 

$

(4,809

)

 

$

(5,305

)

Less: net loss attributable to non-controlling interest

 

 

(597

)

 

 

(186

)

 

 

(704

)

 

 

(375

)

Net loss attributable to Great Elm Group, Inc.

 

$

(349

)

 

$

(1,841

)

 

$

(4,105

)

 

$

(4,930

)

Net loss attributable to shareholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.07

)

 

$

(0.16

)

 

$

(0.19

)

Diluted

 

 

(0.01

)

 

 

(0.07

)

 

 

(0.16

)

 

 

(0.19

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,678

 

 

 

25,402

 

 

 

25,626

 

 

 

25,387

 

Diluted

 

 

25,678

 

 

 

25,402

 

 

 

25,626

 

 

 

25,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Includes depreciation expense of:

 

 

1,457

 

 

 

1,962

 

 

 

3,205

 

 

 

4,013

 

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenues

 

$

1,898

 

 

$

988

 

 

$

5,637

 

 

$

2,992

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Investment management expenses

 

 

2,593

 

 

 

1,592

 

 

 

6,893

 

 

 

4,748

 

Depreciation and amortization

 

 

281

 

 

 

89

 

 

 

870

 

 

 

307

 

Selling, general and administrative

 

 

1,893

 

 

 

1,582

 

 

 

5,441

 

 

 

4,620

 

Expenses of Consolidated Fund

 

 

-

 

 

 

42

 

 

 

46

 

 

 

139

 

Total operating costs and expenses

 

 

4,767

 

 

 

3,305

 

 

 

13,250

 

 

 

9,814

 

Operating loss

 

 

(2,869

)

 

 

(2,317

)

 

 

(7,613

)

 

 

(6,822

)

Dividends and interest income

 

 

1,520

 

 

 

642

 

 

 

4,432

 

 

 

1,939

 

Net realized and unrealized gain (loss) on investments

 

 

1,989

 

 

 

(3,220

)

 

 

17,434

 

 

 

(5,055

)

Net realized and unrealized loss on investments of Consolidated Fund

 

-

 

 

 

(284

)

 

 

(16

)

 

 

(279

)

Gain on sale of controlling interest in subsidiary

 

 

-

 

 

 

-

 

 

 

10,524

 

 

 

-

 

Interest expense

 

 

(1,095

)

 

 

(1,286

)

 

 

(5,024

)

 

 

(3,872

)

(Loss) income before income taxes from continuing operations

 

 

(455

)

 

 

(6,465

)

 

 

19,737

 

 

 

(14,089

)

Income tax (expense) benefit

 

 

-

 

 

 

(2

)

 

 

(2

)

 

 

83

 

Net (loss) income from continuing operations

 

 

(455

)

 

 

(6,467

)

 

 

19,735

 

 

 

(14,006

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations

 

 

12,203

 

 

 

332

 

 

 

13,202

 

 

 

3,818

 

Net income (loss)

 

$

11,748

 

 

$

(6,135

)

 

$

32,937

 

 

$

(10,188

)

Less: net income (loss) attributable to non-controlling interest, continuing operations

 

 

-

 

 

 

1,146

 

 

 

(1,554

)

 

 

913

 

Less: net (loss) income attributable to non-controlling interest, discontinued operations

 

 

-

 

 

 

(1,372

)

 

 

1,504

 

 

 

(754

)

Net income (loss) attributable to Great Elm Group, Inc.

 

$

11,748

 

 

$

(5,909

)

 

$

32,987

 

 

$

(10,347

)

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

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

28,997

 

 

 

26,842

 

 

 

28,779

 

 

 

26,963

 

Diluted

 

 

28,997

 

 

 

26,842

 

 

 

40,673

 

 

 

26,963

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Great Elm Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amountsAmounts in thousands

Dollar and share amounts in thousands

 

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, 2020

 

 

25,530

 

 

$

26

 

 

$

3,318,117

 

 

$

(3,257,349

)

 

 

$

60,794

 

 

$

3,886

 

 

$

64,680

 

 

 

$

3,890

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,756

)

 

 

 

(3,756

)

 

 

(61

)

 

 

(3,817

)

 

 

 

(46

)

Issuance of common stock related to vesting of restricted stock

 

 

116

 

 

 

0

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

429

 

 

 

-

 

 

 

 

429

 

 

 

-

 

 

 

429

 

 

 

 

-

 

BALANCE, September 30, 2020

 

 

25,646

 

 

$

26

 

 

$

3,318,546

 

 

$

(3,261,105

)

 

 

$

57,467

 

 

$

3,825

 

 

$

61,292

 

 

 

$

3,844

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(349

)

 

 

 

(349

)

 

 

(305

)

 

 

(654

)

 

 

 

(292

)

Issuance of common stock related to vesting of restricted stock

 

 

45

 

 

 

0

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Distributions to non-controlling interest holders of DME Inc.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

(985

)

 

 

(985

)

 

 

 

(985

)

Issuance of Forest common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

2,700

 

 

 

2,700

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

285

 

 

 

-

 

 

 

 

285

 

 

 

-

 

 

 

285

 

 

 

 

-

 

BALANCE, December 31, 2020

 

 

25,691

 

 

$

26

 

 

$

3,318,831

 

 

$

(3,261,454

)

 

 

$

57,403

 

 

$

5,235

 

 

$

62,638

 

 

 

$

2,567

 

 

 

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, 2022

 

 

28,507

 

 

$

29

 

 

$

3,312,763

 

 

$

(3,279,296

)

 

 

$

33,496

 

 

$

6,533

 

 

$

40,029

 

 

 

$

2,225

 

Net (loss) income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,291

)

 

 

 

(8,291

)

 

 

(910

)

 

 

(9,201

)

 

 

 

662

 

Distributions to non-controlling interests in Consolidated Fund

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

(634

)

 

 

(634

)

 

 

 

-

 

Issuance of common stock related to vesting of restricted stock

 

 

267

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

834

 

 

 

-

 

 

 

 

834

 

 

 

-

 

 

 

834

 

 

 

 

-

 

BALANCE, September 30, 2022

 

 

28,774

 

 

$

29

 

 

$

3,313,597

 

 

$

(3,287,587

)

 

 

$

26,039

 

 

$

4,989

 

 

$

31,028

 

 

 

$

2,887

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

29,530

 

 

 

 

29,530

 

 

 

108

 

 

 

29,638

 

 

 

 

90

 

Redemption of non-controlling interests upon sale of controlling interest in subsidiary

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

(2,120

)

 

 

(2,120

)

 

 

 

-

 

Issuance of common stock related to vesting of restricted stock

 

 

202

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

576

 

 

 

-

 

 

 

 

576

 

 

 

-

 

 

 

576

 

 

 

 

-

 

BALANCE, December 31, 2022

 

 

28,976

 

 

$

29

 

 

$

3,314,173

 

 

$

(3,258,057

)

 

 

$

56,145

 

 

$

2,977

 

 

$

59,122

 

 

 

$

2,977

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,748

 

 

 

 

11,748

 

 

 

-

 

 

 

11,748

 

 

 

 

-

 

Redemption of non-controlling interests upon sale of subsidiaries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

(2,977

)

 

 

(2,977

)

 

 

 

(2,977

)

Issuance of common stock related to vesting of restricted stock

 

 

170

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

564

 

 

 

-

 

 

 

 

564

 

 

 

-

 

 

 

564

 

 

 

 

-

 

BALANCE, March 31, 2023

 

 

29,146

 

 

$

29

 

 

$

3,314,737

 

 

$

(3,246,309

)

 

 

$

68,457

 

 

$

-

 

 

$

68,457

 

 

 

$

-

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Great Elm Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amountsAmounts in thousands

 

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

 

 

Common Stock

 

 

Additional
Paid-in

 

Accumulated

 

 

 

Total Great Elm Group, Inc. Stockholders'

 

Non-
controlling

 

Total Stockholders'

 

 

 

Contingently Redeemable Non-controlling

 

BALANCE, June 30, 2019

 

 

25,353

 

 

$

25

 

 

$

3,305,415

 

 

$

(3,244,374

)

 

 

$

61,066

 

 

$

4,016

 

 

$

65,082

 

 

 

$

3,912

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,089

)

 

 

 

(3,089

)

 

 

(109

)

 

 

(3,198

)

 

 

 

(80

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(200

)

 

 

 

(200

)

 

 

101

 

 

 

(99

)

 

 

 

205

 

Issuance of interests in Consolidated Fund, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

527

 

 

 

527

 

 

 

 

-

 

Issuance of common stock related to vesting of restricted stock

 

 

30

 

 

 

0

 

 

 

0

 

 

 

-

 

 

 

 

0

 

 

 

-

 

 

 

0

 

 

 

 

-

 

 

 

145

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

293

 

 

 

-

 

 

 

 

293

 

 

 

-

 

 

 

293

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

581

 

 

 

-

 

 

 

 

581

 

 

 

-

 

 

 

581

 

 

 

 

-

 

BALANCE, September 30, 2019

 

 

25,383

 

 

$

25

 

 

$

3,305,708

 

 

$

(3,247,463

)

 

 

$

58,270

 

 

$

3,907

 

 

$

62,177

 

 

 

$

3,832

 

BALANCE, September 30, 2021

 

 

26,093

 

 

$

26

 

 

$

3,308,194

 

 

$

(3,264,603

)

 

 

$

43,617

 

 

$

10,177

 

 

$

53,794

 

 

 

$

2,844

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,841

)

 

 

 

(1,841

)

 

 

(108

)

 

 

(1,949

)

 

 

 

(78

)

 

 

-

 

 

 

-

��

 

 

-

 

 

 

(4,238

)

 

 

 

(4,238

)

 

 

(24

)

 

 

(4,262

)

 

 

 

104

 

Redemption of interests in Consolidated Fund, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

(962

)

 

 

(962

)

 

 

 

-

 

Issuance of common stock related to vesting of restricted stock

 

 

29

 

 

 

0

 

 

 

0

 

 

 

-

 

 

 

 

0

 

 

 

-

 

 

 

0

 

 

 

 

-

 

 

 

722

 

 

1

 

 

 

-

 

 

 

-

 

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

208

 

 

 

-

 

 

 

 

208

 

 

 

-

 

 

 

208

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,131

 

 

 

-

 

 

 

 

1,131

 

 

 

-

 

 

 

1,131

 

 

 

 

-

 

BALANCE, December 31, 2019

 

 

25,411

 

 

$

25

 

 

$

3,305,916

 

 

$

(3,249,304

)

 

 

$

56,637

 

 

$

3,799

 

 

$

60,436

 

 

 

$

3,754

 

BALANCE, December 31, 2021

 

 

26,815

 

 

$

27

 

 

$

3,309,325

 

 

$

(3,268,841

)

 

 

$

40,511

 

 

$

9,191

 

 

$

49,702

 

 

 

$

2,948

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,909

)

 

 

 

(5,909

)

 

 

460

 

 

 

(5,449

)

 

 

 

(686

)

Repurchase of interests in subsidiary

 

 

-

 

 

 

-

 

 

 

(129

)

 

 

-

 

 

 

 

(129

)

 

 

86

 

 

 

(43

)

 

 

 

-

 

Issuance of common stock related to vesting of restricted stock

 

 

148

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

508

 

 

 

-

 

 

 

 

508

 

 

 

-

 

 

 

508

 

 

 

 

-

 

BALANCE, March 31, 2022

 

 

26,963

 

 

$

27

 

 

$

3,309,704

 

 

$

(3,274,750

)

 

 

$

34,981

 

 

$

9,737

 

 

$

44,718

 

 

 

$

2,262

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Great Elm Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Dollar amounts in thousands

 

 

For the six months ended December 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,809

)

 

$

(5,305

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,247

 

 

 

6,210

 

Stock-based compensation

 

 

714

 

 

 

501

 

Purchases of investments by consolidated fund

 

 

(3,320

)

 

 

-

 

Stock dividends received from GECC

 

 

(1,418

)

 

 

-

 

Unrealized (gain) loss on investments

 

 

(724

)

 

 

1,809

 

Non-cash interest and amortization of debt issuance costs

 

 

1,858

 

 

 

471

 

Deferred tax benefit

 

 

28

 

 

 

54

 

Other non-cash expense, net

 

 

803

 

 

 

679

 

Gain on sale of equipment held for rental

 

 

(146

)

 

 

(385

)

Change in fair value of contingent consideration

 

 

-

 

 

 

(1,135

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Related party receivable

 

 

(320

)

 

 

49

 

Accounts receivable

 

 

394

 

 

 

668

 

Inventories

 

 

503

 

 

 

(417

)

Prepaid assets, deposits, and other assets

 

 

(557

)

 

 

(412

)

Operating leases

 

 

(818

)

 

 

(689

)

Related party payable

 

 

-

 

 

 

(805

)

Deferred revenues

 

 

(280

)

 

 

35

 

Accounts payable, accrued liabilities and other liabilities

 

 

1,157

 

 

 

1,818

 

Net cash (used in) provided by operating activities

 

 

(1,688

)

 

 

3,146

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(75

)

 

 

-

 

Participation in related party rights offering

 

 

(8,751

)

 

 

-

 

Purchases of equipment held for rental

 

 

(3,060

)

 

 

(3,547

)

Proceeds from sale of equipment held for rental

 

 

495

 

 

 

1,044

 

Purchases of property and equipment

 

 

(57

)

 

 

(526

)

Proceeds from sale of property and equipment

 

 

-

 

 

 

37

 

Net cash used in investing activities

 

 

(11,448

)

 

 

(2,992

)

 

 

For the nine months ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

19,735

 

 

$

(14,006

)

Adjustments to reconcile net income (loss) to net cash from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

870

 

 

 

307

 

Stock-based compensation

 

 

1,974

 

 

 

2,220

 

Sales of investments by Consolidated Fund

 

 

1,558

 

 

 

24,523

 

Purchases of investments by Consolidated Fund

 

 

-

 

 

 

(11,687

)

Stock dividends received

 

 

-

 

 

 

(193

)

Unrealized loss on investments from Consolidated Fund

 

 

-

 

 

 

218

 

Realized loss on investments from Consolidated Fund

 

 

16

 

 

 

61

 

Unrealized (gain) loss on investments

 

 

(12,776

)

 

 

4,402

 

Realized (gain) loss on investments

 

 

(4,658

)

 

 

653

 

Gain on sale of controlling interest in subsidiary

 

 

(10,524

)

 

 

-

 

Non-cash interest and amortization of capitalized issuance costs

 

 

1,737

 

 

 

1,071

 

Deferred tax expense (benefit)

 

 

4

 

 

 

(89

)

Change in fair value of contingent consideration

 

 

180

 

 

 

-

 

Other non-cash expense, net

 

 

324

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables from managed funds

 

 

(272

)

 

 

81

 

Prepaid assets, deposits, and other assets

 

 

778

 

 

 

385

 

Real estate under development

 

 

(1,600

)

 

 

-

 

Operating leases

 

 

(70

)

 

 

(16

)

Accounts payable, accrued expenses and other liabilities

 

 

(849

)

 

 

(1,115

)

Net cash (used in) provided by operating activities - continuing operations

 

 

(3,573

)

 

 

6,815

 

Net cash provided by operating activities - discontinued operations

 

 

766

 

 

 

8,593

 

Net cash (used in) provided by operating activities

 

 

(2,807

)

 

 

15,408

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sale of controlling interest in subsidiary, net of cash sold

 

 

17,735

 

 

 

-

 

Purchases of investments

 

 

(3,105

)

 

 

(165

)

Sales of investments

 

 

26,527

 

 

 

187

 

Purchases of property and equipment

 

 

(37

)

 

 

(3

)

Net cash provided by investing activities - continuing operations

 

 

41,120

 

 

 

19

 

Net cash provided by (used in) investing activities - discontinued operations

 

 

67,230

 

 

 

(4,545

)

Net cash provided by (used in) investing activities

 

 

108,350

 

 

 

(4,526

)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Great Elm Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

Dollar amounts in thousands

 

 

For the six months ended December 31,

 

 

 

2020

 

 

2019

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds on revolving line of credit

 

 

-

 

 

 

800

 

Principal payments on revolving line of credit

 

 

(3,900

)

 

 

(2,050

)

Principal payments on long term debt

 

 

(1,135

)

 

 

(1,053

)

Principal payments on related party notes payable

 

 

(25,105

)

 

 

(1,315

)

Principal payments on equipment financing debt

 

 

(1,983

)

 

 

(1,246

)

Proceeds from equipment financing debt

 

 

1,630

 

 

 

1,264

 

Capitalized issuance costs

 

 

(1,250

)

 

 

-

 

Dividends paid to non-controlling interest holders of DME Inc.

 

 

(368

)

 

 

-

 

Issuance of Forest preferred stock

 

 

35,010

 

 

 

-

 

Proceeds from sale of Forest common stock, gross

 

 

2,700

 

 

 

-

 

Net cash provided by (used in) financing activities

 

 

5,599

 

 

 

(3,600

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(7,537

)

 

 

(3,446

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

41,365

 

 

 

12,830

 

Cash, cash equivalents and restricted cash at end of period

 

$

33,828

 

 

$

9,384

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,231

 

 

$

3,643

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Lease liabilities and right of use assets arising from operating leases

 

$

426

 

 

$

260

 

Distribution of HC LLC preferred stock to non-controlling interest holders of DME Inc.

 

 

1,602

 

 

 

-

 

 

 

For the nine months ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from financing activities:

 

 

 

 

 

 

Principal payments on related party notes payable

 

 

(41,765

)

 

 

-

 

Repurchases of interests in subsidiary

 

 

-

 

 

 

(43

)

Distributions to non-controlling interests in Consolidated Fund

 

 

(634

)

 

 

(912

)

Due to broker of Consolidated Fund

 

 

-

 

 

 

(12,257

)

Capital contributions from non-controlling interests in Consolidated Fund

 

 

-

 

 

 

24

 

Net cash used in financing activities - continuing operations

 

 

(42,399

)

 

 

(13,188

)

Net cash (used in) provided by financing activities - discontinued operations

 

 

(5,221

)

 

 

670

 

Net cash used in financing activities

 

 

(47,620

)

 

 

(12,518

)

Net increase (decrease) in cash and cash equivalents, including cash and cash equivalents classified within current assets held for sale

 

 

57,923

 

 

 

(1,636

)

Less: net increase in cash and cash equivalents classified within current assets held for sale

 

 

(62,775

)

 

 

(4,718

)

Add: cash received from discontinued operations

 

 

66,689

 

 

 

4,329

 

Net increase (decrease) in cash and cash equivalents

 

 

61,837

 

 

 

(2,025

)

Cash and cash equivalents at beginning of period

 

 

22,281

 

 

 

18,745

 

Cash and cash equivalents at end of period

 

$

84,118

 

 

$

16,720

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,348

 

 

$

2,397

 

 

 

 

 

 

 

 

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 following table reconciles the amounts shown for cash and cash equivalents and restricted cash in the condensed consolidated balance sheets to the amounts shown for cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows.

 

 

December 31, 2020

 

 

June 30, 2020

 

Cash and cash equivalents

 

$

32,894

 

 

$

40,519

 

Restricted cash

 

 

934

 

 

 

846

 

Cash, cash equivalents and restricted cash

 

$

33,828

 

 

$

41,365

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


Great Elm Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

DecemberMarch 31, 20202023

1. Organization

Great Elm Group, Inc. (the (referred to as the Company or GEG) is a holdingan alternative asset management company incorporated in Delaware. The Company currently has 3 business operating segments: durable medical equipment, investment managementoperates in one segment which focuses on growing a scalable and real estate, with generaldiversified portfolio of long-duration, permanent capital vehicles across corporate representing unallocated costs and activity to arrive at consolidated operations.  The Company is pursuing business development opportunities in durable medical equipment, investment management,credit, specialty finance, real estate and other industries.asset classes.

On December 29, 2020, the Company completed a reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc.  Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG”.  Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Exchange Act. The Holding Company Reorganization (as defined in Note 4 – Holding Company Reorganization) was a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries.  Wholly-owned subsidiaries, includeincluding 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. and(DME Holdings), Great Elm DME Manager, LLC.  Majority-ownedLLC (DME Manager), and Monomoy BTS Corporation (MBTS), as well as its majority-owned subsidiaries include Forest GECC GP Corp., Great Elm FM Acquisition, Inc., Great Elm FM Holdings, Inc., CRIC IT Fort Myers, LLC (CRIC IT), Great Elm DME,Investments, Inc. (DME Inc.Forest) (through December 30, 2022) and Great Elm Healthcare, LLC (HC LLC) and its seven wholly-owned subsidiaries.subsidiaries (through January 3, 2023). In addition, we have determined that the Company is 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

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 whichthat are normally included in the Company’s Form 10-K.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.  The condensed

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, 2020,2022. In addition, the historical results of the DME Business and related activity have been presented herein, has been derived fromin the Company’s auditedaccompanying unaudited condensed consolidated financial statements as of andoperations for the year-ended June 30, 2020.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. The most important ofIncluded in these estimates and assumptions are items that relate to revenue recognition, recognition of rental income, the valuation of excess and obsolete inventories, depreciable lives of equipment, impairment of long lived tangible and intangible assets, valuation allowance for deferred tax assets, fair value measurements including the initial bifurcation and subsequent measurement of embedded derivatives and features and hybrid instruments, stock-based compensation and contingent consideration, estimates associated with the application of acquisition accounting, and the value of lease liabilities and corresponding right toof use assets. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

9


Principles of Consolidation

The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries;and majority-owned subsidiaries; andsubsidiaries, 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 1411 – 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

Segments

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 has 3 business operating segments: durable medical equipment, investment management andis 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 with general corporate representing unallocated costsunder development (current), which includes real estate projects that are in the process of being developed and activityexpected to arrive at consolidated operations.  The Company regularly reviews each segmentbe 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 purposes of allocating resourcessale, which includes land and assessing performance.

Accounts Receivable

Substantiallycompleted improvements thereon that meet all of the accounts receivable balance relates“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 durable medical equipment business.  Accounts receivableactivities related to development have begun and ceases when activities are customer obligations duesubstantially complete and the asset is available for occupancy.

Real estate under normal salesdevelopment is evaluated for impairment and rental terms and represent the amountlosses are recorded when undiscounted cash flows estimated to be collected fromgenerated by an asset are less than the customers and,asset’s carrying amount. The amount of the impairment loss, if applicable,any, is calculated as the third-party private insurance providerexcess of the asset’s carrying value over its fair value, which is determined using a discounted cash flow analysis, management estimates or government program (collectively, market comparisons.

Payors),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 contractual agreements.  The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers.  Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected.  The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers.  Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers.  The revenue reserves related to constraints on variable consideration were $4.1 million and $4.8 million as of December 31, 2020 and June 30, 2020, respectively.  During the three and six months ended December 31, 2020 and 2019, the Company recognized reductions to revenue of $1.5 million and $2.6 million, and $0.5asset.


 million and $1.4 million, respectively, related to such constraints.  See Note 3 – Revenue.

The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known.  There were no material adjustments to revenues made in the six months ended December 31, 2020 relating to prior periods.  Changes in constraints on variable consideration are recorded as a component of net revenues.

The Company generally does not allow returns from customers for reasons not covered under the manufacturer’s standard warranty.  Therefore, there is no provision for sales return reserves.  The Company does not have significant bad debt experience with Payors, and therefore the allowance for doubtful accounts is immaterial.

As of December 31, 2020 and June 30, 2020, the Company had unbilled receivables of approximately $1.3 million and $1.9 million, respectively, that relate to transactions where the Company has the ultimate right to invoice a Payor under the terms of the arrangement but are not currently billed.  Previously disclosed unbilled amounts have been updated to reflect current presentation.  These unbilled amounts are included in accounts receivable in the condensed consolidated balance sheets.

10


Net Income (Loss)Earnings per Share

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

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands except per share amounts)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

 

$

(946

)

 

$

(2,027

)

 

$

(4,809

)

 

$

(5,305

)

Less: net loss attributable to non-controlling interest

 

 

(597

)

 

 

(186

)

 

 

(704

)

 

 

(375

)

Net loss attributable to Great Elm Group, Inc.

 

$

(349

)

 

$

(1,841

)

 

$

(4,105

)

 

$

(4,930

)

Net loss attributable to shareholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.07

)

 

$

(0.16

)

 

$

(0.19

)

Diluted

 

$

(0.01

)

 

$

(0.07

)

 

$

(0.16

)

 

$

(0.19

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,678

 

 

 

25,402

 

 

 

25,626

 

 

 

25,387

 

Diluted

 

 

25,678

 

 

 

25,402

 

 

 

25,626

 

 

 

25,387

 

 

 

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

)

When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents.  As of DecemberMarch 31, 2020,2023, the Company had 12,307,8631,270,651 potential shares of common stock including 9,008,612issuable 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 Company 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 Note 12 –the diluted income (loss) per share calculation for the three months ended March 31, 2023 because to do so would be anti-dilutive.

11


As of March 31, 2022, the Company had 10,139,031 potential shares of common stock issuable upon the conversion of Convertible Notes)Notes and 3,299,2513,159,856 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 net lossincome (loss) per share calculationscalculation because to do so would be antidilutive.  anti-dilutive.

As of DecemberMarch 31, 2019, the Company had 3,402,602 potential shares of Company common stock issuable upon exercise of the stock options2023 and vesting of restricted stock units and restricted stock awards that are not included in the diluted net loss per share calculations because to do so would be antidilutive.

As of December 31, 2020 and 2019,2022, the Company had an aggregate of 732,9091,509,885 and 579,423 issued shares, respectively, that are subject to forfeiture by the employee at a nominal price if service and performance milestones are not met.  The Company does not account for such shares as beingconsidered outstanding for accounting purposes since they are unvested and subject to forfeiture.

Restrictions on Subsidiary Dividends

Underforfeiture by the GP Corp. Note Agreement, GECC GP Corp. agreedemployees at a nominal price if service milestones are not to declare any dividends until the GP Corp. Note is satisfied.  Under the Senior Note and Subordinated Note, CRIC IT Fort Myers, LLC is restricted from paying any dividends until the Notes are satisfied.  The ability of DME Inc. to pay dividends is subject to compliance with the restricted payment covenants under the DME Revolver.

Concentration of Risk

The Company’s net investment revenue and receivables for the periods presented were attributable to the management of one investment vehicle, GECC, which is also a related party.  See Note 5 – Related Party Transactions.

The Company’s real estate rental revenue is derived from one tenant.

11


The Company’s durable medical equipment revenue and related accounts receivable are concentrated with third-party Payors.  The following table summarizes customer concentrations as a percentage of revenues:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Government Payor A

 

32%

 

 

30%

 

 

33%

 

 

29%

 

Government Payor B

 

*

 

 

10%

 

 

*

 

 

*

 

Third-party Payor C

 

12%

 

 

13%

 

 

11%

 

 

10%

 

* Not a significant concentration.

The following table summarizes customer concentrations as a percentage of accounts receivable:

 

 

As of

 

 

 

December 31, 2020

 

 

June 30, 2020

 

Government Payor A

 

21%

 

 

20%

 

Government Payor B

 

*

 

 

11%

 

Third-party Payor C

 

15%

 

 

11%

 

* Not a significant concentration

Recently Adopted Accounting Standards

Fair Value MeasurementsIn August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, resulting in various disclosures related to fair value measurements being eliminated, modified or supplemented.  ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019, with an option to early adopt any eliminated or modified disclosures, and to delay adoption of the additional disclosures, until the effective date.  The Company early adopted the eliminated and modified disclosures of ASU 2018-13 during the three months ended September 30, 2018 and, as a result, updated its financial statement disclosures accordingly. A modified narrative description of measurement uncertainty for level 3 fair value measurements was applied prospectively, with all other amendments applied retrospectively.  The Company has adopted the supplemental disclosures as of July 1, 2020.met.

Recently Issued Accounting Standards

Current Expected Credit LossesLosses. 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 Reform. In March 2020 and January 2021, the FASB issued ASU 2020-04,, Reference Rate Reform (Topic 848): facilitationFacilitation of the Effects of Reference Rate Reform on Financial Reporting in response to the United Kingdom Financial Conduct Authority, and ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which announced the desire to phase out the use of London Interbank Offered Rate (LIBOR) by the end of 2021.  The provisions 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. If LIBOR ceasesIn 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 exist, we may needDecember 31, 2024 to renegotiate outstanding notes payable outstanding which extend beyond 2021align the temporary accounting relief guidance with the respective counterparties.  Adoptionexpected LIBOR cessation date of the provisions in ASU 2020-04 are optional and effective from March 12, 2020 through December 31, 2022.  We are currently evaluating the impact of this ASU on our financial statements.

12


Accounting for Convertible Instruments  In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models.  Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features.  Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate.  In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.  The guidance in this ASU are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years.  Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.June 30, 2023. The Company is currently evaluating the potential impact that the adoption of this ASUthese ASUs will have on its consolidated financial statements.

3. RevenueForest 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 Series 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, the Company partially repaid the Forest Note in the amount of $18.4 million. As of December 31, 2022, the remaining balance, inclusive of accrued interest, due to Forest under the Forest Note was $19.7 million, which 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 three and nine months ended March 31, 2023, the Company recorded interest expense of approximately $10 thousand and $19 thousand, respectively, with respect to the Forest Note.

12


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 constitute 61% of the issued and outstanding shares of Forest’s common stock, to JPM for approximately $18.4 million in cash (the Sale of Controlling Interest in Forest). 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 condensed consolidated statement of operations for the nine months ended March 31, 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 an unrealized gain on our Investment in Forest of $24.4 million during the three and six months ended December 31, 2022 within net realized and unrealized gain (loss) on investments on the consolidated statements 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 Great Elm Group, Inc.:

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Loss before income taxes

 

 

-

 

 

 

(482

)

 

 

(2,679

)

 

 

(1,442

)

Loss before income taxes attributable to Great Elm Group, Inc.

 

 

-

 

 

 

(1,726

)

 

 

(1,133

)

 

 

(2,508

)

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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 the total realized gain on our Investment in Forest for three and nine months ended March 31, 2023 of $24.4 million recorded within net realized and unrealized gain (loss) on investments on the consolidated statements of operations.

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. The following table shows calculation of the recorded 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

 

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The Company concluded that the disposal group satisfied the criteria for presentation as held for sale and discontinued operations as of December 31, 2022. The following table provides a reconciliation of the Company’s net income from discontinued operations presented in the condensed consolidated statements of operations:

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Durable medical equipment sales and services revenue

 

$

-

 

 

$

10,359

 

 

$

21,574

 

 

$

30,712

 

Durable medical equipment rental income

 

 

-

 

 

 

5,275

 

 

 

11,874

 

 

 

16,205

 

Net revenue

 

 

-

 

 

 

15,634

 

 

 

33,448

 

 

 

46,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

-

 

 

 

(4,362

)

 

 

(8,654

)

 

 

(12,731

)

Cost of durable medical equipment rentals

 

 

-

 

 

 

(1,708

)

 

 

(4,263

)

 

 

(5,292

)

Durable medical equipment other operating expenses

 

 

-

 

 

 

(8,758

)

 

 

(17,519

)

 

 

(23,327

)

Depreciation and amortization

 

 

-

 

 

 

(428

)

 

 

(783

)

 

 

(1,324

)

Transaction costs

 

 

(1,023

)

 

 

-

 

 

 

(2,462

)

 

 

(224

)

Gain on sale of subsidiary

 

 

13,552

 

 

 

-

 

 

 

13,552

 

 

 

-

 

Interest expense

 

 

-

 

 

 

(68

)

 

 

(46

)

 

 

(206

)

Loss on distinguishment of debt

 

 

-

 

 

 

-

 

 

 

(23

)

 

 

-

 

Other income (expense), net

 

 

(202

)

 

 

-

 

 

 

(192

)

 

 

2

 

Income before income taxes from discontinued operations

 

 

12,327

 

 

 

310

 

 

 

13,058

 

 

 

3,815

 

Income tax (expense) benefit

 

 

(124

)

 

 

22

 

 

 

144

 

 

 

3

 

Net income from discontinued operations

 

$

12,203

 

 

$

332

 

 

$

13,202

 

 

$

3,818

 

The following table provides a reconciliation of the assets and liabilities held for sale presented in the condensed 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 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

 

15


5. Revenue

The revenues from each major source of revenue are summarized in the following table:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Product and Services Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management Fees

 

$

609

 

 

$

760

 

 

$

1,210

 

 

$

1,518

 

Administration Fees

 

 

151

 

 

 

129

 

 

 

323

 

 

 

238

 

 

 

 

760

 

 

 

889

 

 

 

1,533

 

 

 

1,756

 

Durable Medical Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment Sales

 

 

8,411

 

 

 

7,587

 

 

 

16,419

 

 

 

13,948

 

Service Revenues

 

 

1,133

 

 

 

1,460

 

 

 

2,338

 

 

 

2,844

 

 

 

 

9,544

 

 

 

9,047

 

 

 

18,757

 

 

 

16,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total product and services revenue

 

$

10,304

 

 

$

9,936

 

 

$

20,290

 

 

$

18,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Income

 

 

1,276

 

 

 

1,271

 

 

 

2,548

 

 

 

2,544

 

Durable Medical Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical Equipment Rental Income

 

 

4,999

 

 

 

5,344

 

 

 

10,396

 

 

 

10,830

 

Total rental revenue

 

 

6,275

 

 

 

6,615

 

 

 

12,944

 

 

 

13,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

16,579

 

 

$

16,551

 

 

$

33,234

 

 

$

31,922

 

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Management fees

 

$

1,384

 

 

$

779

 

 

$

4,067

 

 

$

2,550

 

Property management fees

 

 

278

 

 

 

-

 

 

 

830

 

 

 

-

 

Administration and service fees

 

 

236

 

 

 

209

 

 

 

740

 

 

 

442

 

Total revenues

 

$

1,898

 

 

$

988

 

 

$

5,637

 

 

$

2,992

 

Revenue Accounting Under Topic 606

In determining the appropriate amount of revenue to be recognized under FASB Accounting Standards Codification Topic 606, Revenues, (Topic 606) the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) the Company satisfies each performance obligation.

13


Durable Medical Equipment Revenue

Equipment Sales and Services Revenues

The Company sells durable medical equipment, replacement parts and supplies to customers and recognizes revenue at the point control is transferred through delivery to the customer.  Each piece of equipment, part or supply is distinct and separately priced thus they each represent a single performance obligation.  The revenue is allocated amongst the performance obligations based upon the relative standalone selling price method, however, items are typically all delivered or supplied together.  The customer and, if applicable, the Payors are generally charged at the time that the product is sold, although separate layers of insurance coverage may need to be invoiced before final billings may occur.

The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met.

The transaction price on both equipment sales and sleep studies is the amount that the Company expects to receive in exchange for the goods and services provided.  Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility.  As such, we constrain the transaction price for the difference between the gross charge and what we believe we will collect from Payors and from patients.  The transaction price therefore is predominantly based on contractual payment rates determined by the Payors.  The Company does not generally contract with uninsured customers.  We determine our estimates of billing adjustments based upon contractual agreements, our policies and historical experience.  While the rates are fixed for the product or service with the customer and the Payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, from the patient customer.  The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the Payor billings at contractual rates.  The transaction price is initially constrained by the amount of customer co-payments we estimate will not be collected.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable.  Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.  Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded.  Such adjustments are typically identified and recorded at the point of cash application or claim denial.  The Company constrains revenue for these estimated adjustments.  There were no material changes in estimates recorded in the six months ended December 31, 2020, relating to prior periods.

The payment terms and conditions of customer contracts vary by customer type and the products and services offered.

The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation.  Returns and refunds are not accepted on either equipment sales or sleep study services.  The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue.  The Company does not incur contract acquisition costs.  The Company does not have any partially or unfilled performance obligations related to contracts with customers.  However, during the quarter ended June 30, 2020, the Company applied for and received $4.4 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS) under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic.  These advance payments will begin to be recouped against the Company’s future Medicare and Medicaid claims beginning in the fourth quarter of our fiscal year 2021.  These amounts are included within deferred revenue on the condensed consolidated balance sheet.  The Company has 0 other contract liabilities as of December 31, 2020 or September 30, 2020.

Included in sales and services revenue are unbilled amounts for which the revenue recognition criteria had been met as of period end but were not yet billed to the Payor.  The estimate of net unbilled rental revenue recognized is based on historical trends and estimates of future collectability.  As of December 31, 2020 and June 30, 2020, net unbilled sales and services revenue is approximately $0.8 million and $1.2 million, respectively, and is included in accounts receivable.

14


Investment Management Revenue

The Company recognizes revenue from its investment management businessrevenue at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer.customers. Investment management revenue primarily consists of fees based on a percentage of assets under management;management, fees based on the performance of managed assets;assets, and administrativeadministration and service fees. Fees are based on agreements with each investment product and 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 agreementagreements GECM has with GECC.Great Elm Capital Corp. (GECC), Monomoy Properties UpREIT, LLC, the operating partnership of Monomoy Properties REIT, LLC (Monomoy UpREIT) and other private funds managed by GECM (collectively, the Funds). The performance obligation is satisfied and management fee revenue is recognized over time as the services are rendered, since GECCthe Funds simultaneously receivesreceive and consumesconsume 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 GECC’sthe Monomoy UpREIT investment management agreement, with GECM the baseis also entitled to 4.0% of rent collected. These fees are collected monthly in arrears. Property management fee from GECC is calculated at an annual rate of 1.50% of GECC’s average adjusted gross assets.  The base management fee is calculated based on the average value of GECC’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, andrevenue is recognized over time as the services are provided.  Management fees are billed quarterly in arrears.

Incentive Fees

The Company earns incentive fees based on the investment management agreements GECM has with GECC and separately managed accounts.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 GECC investment management agreement.agreements. Incentive fees are recognizedearned 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 range from 5.0% to 20.0%are typically 20% of the performance-based metric specified within each agreement. Because of the uncertainty of when incentive fees will be collected due to market conditions and investment performance, incentive fees are fully constrained and not recorded until received and the probability of significant reversal of the fees is eliminated in accordance with the respective investment management agreements.  As of DecemberMarch 31, 2020,2023, there is $9.2was $1.3 million in incentive fees which have been earned per the terms of the respective investment management agreements but not recognized as they are still subject to the constraints described above.

16


Administration and Service Fees

The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimbursesthe investment vehicles reimburse GECM for costs incurred in performing certain administrative functions for GECC.functions. This revenue is recognized over time as the services are performed. AdministrativeAdministration 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.

15


Revenue Accounting Under Topic 842

Durable Medical Equipment Revenue

Equipment Rental Revenue

Under FASB Accounting Standards Codification Topic 842, Leases, (Topic 842) rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured.  The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis.  The contractual length of the lease term varies based on the type of equipment that is rented to the customer, but generally is from 10 to 36-months.  In the case of capped rental agreements, title to the equipment transfers to the customer at the end of the contractual rental period.  The customer has the right to cancel the lease at any time during the rental period for a subsequent month’s rental and payments are generally billed in advance on a month-to-month basis.  Under Topic 842, rental income from operating leases is recognized on a month-to-month basis, based on contractual lease terms when collectability is reasonably assured.  Certain customer co-payments are included in revenue when considered probable of payment.

The lease term begins on the date products are delivered to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial.  There were no material changes in estimates recorded in the six months ended December 31, 2020, relating to prior periods.

Although invoicing typically occurs at the beginning of the monthly rental period, we recognize revenue from rentals on a daily basis.  Since rental agreements can commence at any time during a given month, we defer revenue related to the remaining monthly rental period as of period end.  Deferred revenue related to rentals was $1.0 million and $1.3 million as of December 31, 2020 and June 30, 2020, respectively.

Included in rental revenue are unbilled amounts for which the revenue recognition criteria had been met as of period end but were not yet billed to the Payor.  Net unbilled rental revenue is recognized to the extent payment is probable.  As of December 31, 2020 and June 30, 2020, net unbilled rental revenue is approximately $0.5 million and $0.7 million, respectively, and is included in accounts receivable.

Real Estate Revenue

Rental Revenue

Consistent with the leases of durable medical equipment, the Company recognizes rental revenue on a straight-line basis over the non-cancelable term of the lease.  Under the terms of the lease, the Company may recover from the tenant certain expenses, including: real estate taxes, insurance and other operating expenses.  The recovery of these expenses is recognized in rental income in the accompanying condensed consolidated statements of operations, in the same periods as the expenses are incurred.  These expenses recognized in both revenue and expense may fluctuate from period to period based on actual expense amounts.

4. Holding Company Reorganization and Financing Transaction

Holding Company Reorganization

On December 21, 2020, GECannounced plans to create a new public holding company, Great Elm Group, Inc. (the Company) by implementing a holding company reorganization (the Holding Company Reorganization).  Following the Holding Company Reorganization, the Company became the successor issuer to GEC.

16


On December 29, 2020, pursuant to the terms of the Agreement and Plan of Merger, dated as of December 21, 2020, among Forest, the Company and Forest Merger Sub, Inc., a newly created entity for the purpose of facilitating the Merger, (as it may be amended from time to time, the Merger Agreement), the transactions contemplated by the Merger Agreement (the Transactions) were consummated. As a result of the Transactions, and subject to the same terms and conditions as applied immediately prior to the Transactions, each share of Forest's outstanding common stock, common stock options, restricted stock units and restricted shares were exchanged for identical instruments of the Company.

Financing Transaction

Following the consummation of the Holding Company Reorganization, J.P. Morgan Broker-Dealer Holdings Inc. (JPM), a Delaware corporation and affiliate of JPMorgan Chase & Co., Forest, the Company and JPM agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.

In connection with such financing, among other things:

Forest issued to JPM 35,010 newly issued shares of 9.0% preferred stock (the Forest Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share;

HC LLC issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to the owners of DME Inc. in the form of a distribution.  Ultimately, 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel Capital Partners SBIC, L.P. (Corbel), and 9.95% is held by Valley Healthcare Group, LLC (VHG).  Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;

HC LLC, a wholly-owned subsidiary of DME Inc., and sole owner of the durable medical equipment operating subsidiaries, issued to Forest 34,010 newly issued shares of 9.0% Series A-2 preferred stock (the Series A-2 Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share.  Upon a sale of the durable medical equipment business, such holders of Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale;

HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;

Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and

JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million.

(each collectively noted above, the JPM Transactions).

Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility).  See Note 10 – Borrowings.

5.6. 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.

17


Durable Medical Equipment

In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into a term loan agreement with Corbel (the Corbel Facility).  Jeffrey S. Serota, a member of the Company’s board of directors, serves as Vice Chairman to Corbel Capital Partners.  Corbel previously held an interest in one of our acquired durable medical equipment businesses and was one of the sellers in our acquisition of the business.  As a result of the acquisition, at December 31, 2020 Corbel holds a non-controlling interest in DME Inc.  Pursuant to the Corbel Facility, Corbel was paid a structuring fee and a quarterly monitoring fee.  In conjunction with the JPM Transactions, the Corbel Facility was repaid early on December 29, 2020, and DME Inc. paid a deferred structuring fee as well as a prepayment penalty.  See Note 10 - Borrowings for additional information on the Corbel Facility and Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

In connection with the acquisition of the durable medical equipment businesses, the Company issued non-controlling interests in DME Inc. to the former owners, including Corbel discussed above.

Investment Management

The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC.GECC, Monomoy UpREIT and other investment products. Under these agreements, GECM receives administrativeadministration fees, management fees based on GECC’sthe managed assets (other than cash and cash equivalents) and rent collected, and incentive fees if GECC has net capital gains or if its net investment income exceeds a specified hurdle rate.  Fees underbased on the agreements began to accrue on November 4, 2016.performance of those assets. See Note 35 – Revenue for additional discussions of the fee arrangements.  All of the Company’s investment management revenue recognized for the periods presented was generated from the management and administration of GECC.

The Company’s wholly-owned subsidiary, Great Elm Opportunities GP, Inc. (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 with the subscription date of January 1, 2023 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 statement 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 provided administrative services 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 nine months ended March 31, 2023 (through the date of its dissolution in July 2022) and the three and nine months ended March 31, 2022. The operations of the Consolidated Fund are included in our consolidated financial statements. In July 2022, GESOF liquidated and the Company received a distribution of cash and equity investments, pending final dissolution of the Consolidated Fund.

There are no consolidated funds as of March 31, 2023. See Note 2 – Summary of Significant Accounting Policies for additional details.

The Company retained the specialized investment company accounting guidance under US GAAP with respect to the Consolidated Fund during the periods it was consolidated. As such, investments of the Consolidated Fund were included in the condensed 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 condensed consolidated statements of operations. Non-controlling interests in the Consolidated Fund were included in net income (loss) attributable to non-controlling interest, continuing operations.

Additionally, the Company receives dividends from its investment in GECC and Monomoy UpREIT and earns unrealized gains and losses based on the mark-to-market performance of those investments. See Note 7 – Fair Value Measurements.

17


The following tables summarize activity and outstanding balances between the managed investment products and the Company:

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

 (in thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net realized and unrealized gain (loss) on investments

 

$

895

 

 

$

(3,474

)

 

$

(7,950

)

 

$

(5,838

)

Net realized and unrealized loss on investments of Consolidated Fund

 

 

-

 

 

 

(284

)

 

 

(16

)

 

 

(279

)

Dividend income

 

 

849

 

 

 

549

 

 

 

3,510

 

 

 

1,651

 

 (in thousands)

 

March 31, 2023

 

 

June 30, 2022

 

Dividends receivable

 

$

300

 

 

$

612

 

Investment management revenues receivable

 

 

1,136

 

 

 

1,241

 

Receivable for reimbursable expenses paid

 

 

985

 

 

 

592

 

Receivables from managed funds

 

$

2,421

 

 

$

2,445

 

Outstanding receivables are included in receivables from managed funds in the condensed consolidated balance sheets.

The Company owns 1,569,787 shares of GECC (approximately 20.6% 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, and Adam M. Kleinman is our President, as well as the Chief Compliance Officer of GECC.

In October 2020, GECM entered into a shared personnel and reimbursement agreement with Imperial Capital Asset Management, LLC (ICAM). Jason W. Reese, the Executive Chairman of the Company’s boardBoard of directors,Directors, is the Chief Executive Officer of ICAM. Costs incurred under this agreement relate to human resources, investment management, and other administrative services provided by ICAM employees, for the benefit of the Company, and are included in investment management expenses in the condensed consolidated statementstatements of operations. ForDuring the three and nine months ended DecemberMarch 31, 2020,2023 such costs were $0.1 million.$0.4 million and $1.1 million, respectively. During the three and nine months ended March 31, 2022 such costs were $0.4 million and $0.7 million, respectively.

GEOF isOn August 31, 2021, the Company entered into a Delaware multi-series limited partnership.financial advisory agreement with Imperial Capital, LLC. The Company has determined that each seriesagreement included a retainer fee of GEOF is$0.1 million which was paid in October 2021. In addition, the agreement included a VIE and that the criteria for consolidation are met for onesuccess-based fee upon a sale of HC LLC. Upon completion of the series (the Sale of HC LLC on January 3, 2023, a success fee of $Consolidated Fund0.7).   million was paid to Imperial Capital, LLC. Jason W. Reese is the Co-Founder of Imperial Capital, LLC.

See Note 2 – Summary of Significant Accounting Policies3 - Forest Note and Transactions with JPM for additional details.

The Company has retained the specialized investment company accounting guidance under GAAP with respect to the Consolidated Fund.  As such, investments of the Consolidated Fund are included in the condensed consolidated balance sheets at fair value and the net unrealized gain (loss) on those investments is included as a component of other incomedetails on the condensed consolidated income statement.  As of December 31, 2020 no single issuer or investment of the Consolidated Fund had a fair value greater than 5% of the Company’s total consolidated assets.

Additionally, the Company receives dividends from its investmentForest Note and Investment in GECC and earns unrealized profits and losses based on the mark-to-market performance of its investment in GECC and the investments held in the Consolidated Fund.  See Note 6 – Fair Value Measurements.Forest.

The following tables summarize activity and outstanding balances between the managed investment products and the Company.

18


 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

Change in unrealized gain (loss) on investment in GECC

 

$

2,560

 

 

$

(826

)

 

$

658

 

 

$

(1,809

)

 

Dividend income from GECC

 

 

1,322

 

 

 

588

 

 

 

1,846

 

 

 

1,078

 

 

 

 

As of

 

 

(in thousands)

 

December 31, 2020

 

 

June 30, 2020

 

 

Dividends receivable from GECC

 

$

450

 

 

$

170

 

 

Investment management revenues receivable

 

 

751

 

 

 

746

 

 

Receivable for reimbursable expenses paid

 

 

185

 

 

 

158

 

 

Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets.  Outstanding receivables from the Consolidated Fund are eliminated in consolidation.  As of December 31, 2020, the Company had $0.01 million in receivable for reimbursable expenses paid on behalf of the Consolidated Fund.

The Company is the owner of approximately 23.6% of the outstanding shares of GECC, and the Company’s Chief Executive Officer is also the Chief Executive Officer of GECC and Chief Investment Officer of GECM, in addition to being a member of the board of directors of the Company and chairman of the board of GECC.  The Company’s President and Chief Operating Officer is also the Chief Operating Officer, Chief Compliance Officer and General Counsel of GECM and the Chief Compliance Officer of GECC.

On October 1, 2020, GECC completed a non-transferable rights offering in which the Company received 2,966,531 shares at a price of $2.95 per share for an aggregate total of $8.8 million.

GECM has a profit sharing agreement with the Company’s majority-owned subsidiary GECC GP Corp. (Profit Sharing Agreement).  Under the Profit Sharing Agreement, GECM’s profit from GECC is paid to GECC GP Corp.  Since its inception in November 2016, GECM has operated at a cumulative loss through December 31, 2020; correspondingly, no profits were available to GECC GP Corp. under the Profit Sharing Agreement.  Certain employees of the Company have a non-controlling interest in GECC GP Corp.  See Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

MAST Capital Management, LLC (MAST Capital) is the beneficial owner of approximately 7.6% of the Company’s outstanding common stock as of December 31, 2020 and is the holder of the GP Corp. Note.  See Note 10 - Borrowings for additional discussion of the GP Corp. Note.

Real Estate

In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a 19.9% interest in Great Elm FM Holdings, Inc. (GE FM Holdings).  See Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

General Corporate

In conjunction with the JPM Transactions, on December 29, 2020 Forest sold Forest Preferred Stock and the Company sold common stock in Forest to JPM for cash consideration of $35.0 million and $2.7 million, respectively.  As a result of these transactions, JPM holds a non-controlling interest in Forest.  See Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

On December 18, 2020, the Company purchased from JPM a 21% common stock interest in Ligado Networks, LLC (Ligado), a privately-held Company.  The common stock interest does not convey the ability to exercise significant influence over Ligado, and therefore does not require accounting in accordance with the equity method.  We have elected to account for this investment, which does not have a readily-determinable fair value, at cost minus impairment.  This investment is included in prepaid and other current assets on our consolidated balance sheet.

19


6.7. 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.

US 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.

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 non-recurring basis are summarized in the tables below:

 

Fair Value as of December 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

Fair Value as of March 31, 2023

 

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in GECC

 

$

19,532

 

 

$

0

 

 

$

0

 

 

$

19,532

 

 

Equity investments of Consolidated Fund

 

$

3,417

 

 

$

0

 

 

$

0

 

 

$

3,417

 

 

Equity investments

 

$

17,282

 

 

$

-

 

 

$

-

 

 

$

17,282

 

 

Total assets within the fair value hierarchy

 

$

17,282

 

 

$

-

 

 

$

-

 

 

$

17,282

 

 

Investments valued at net asset value

 

 

 

 

 

 

 

$

17,822

 

 

Total assets

 

$

22,949

 

 

$

0

 

 

$

0

 

 

$

22,949

 

 

 

 

 

 

 

 

 

$

35,104

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participation feature of HC LLC Series A-2 Preferred Stock

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

Contingent consideration liability

 

$

-

 

 

$

-

 

 

$

1,300

 

 

$

1,300

 

 

Total liabilities

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

 

$

-

 

 

$

-

 

 

$

1,300

 

 

$

1,300

 

 

 

 

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

 

 

19


There were no transfers between levels of the fair value hierarchy during the three and nine months ended March 31, 2023 and 2022.

 

 

Fair Value as of June 30, 2020

 

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in GECC

 

$

8,705

 

 

$

0

 

 

$

0

 

 

$

8,705

 

 

Total assets

 

$

8,705

 

 

$

0

 

 

$

0

 

 

$

8,705

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration liability

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

Total liabilities

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

20


The following is a reconciliation of changes in contingent consideration, a Level 3 liability, forliability:

(in thousands)

 

For the three months ended March 31, 2023

 

 

For the nine months ended March 31, 2023

 

Beginning balance

 

$

1,180

 

 

$

1,120

 

Change in fair value

 

 

120

 

 

 

180

 

Ending balance

 

$

1,300

 

 

$

1,300

 

The valuation techniques applied to investments held by the threeCompany and six months ended December 31, 2020:by the Consolidated Fund varied depending on the nature of the investment.

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

Beginning balance

 

$

-

 

 

$

1,135

 

Additions

 

 

-

 

 

 

-

 

Payments

 

 

-

 

 

 

-

 

Change in fair value

 

 

-

 

 

 

(1,135

)

Ending balance

 

$

-

 

 

$

-

 

There were 0 transfers between levelsEquity and equity-related securities

Securities traded on a national securities exchange 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. The private funds calculate NAV in a manner consistent with the measurement principles of FASB Accounting Standards Codification (ASC) Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy duringhierarchy.

As of March 31, 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 six months ended Decemberdate 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 March 31, 2020 and 2019.2023, there were no unfunded commitments.

TheContingent consideration

In conjunction with the acquisition of the Monomoy UpREIT investment management agreement, the Company entered into a contingent consideration arrangement requiredagreement that requires the Company to pay up to $2.1$2.0 million of additional consideration to the former shareholders of the durable medical equipment businesses if certain earnings before interest, taxes, depreciationfee revenue thresholds are achieved during fiscal years ending June 30, 2023 and amortization (EBITDA) thresholds, as adjusted per the terms of the purchase agreement, were achieved for the 12 months ended December 31, 2019.2024. The Company determined that the EBITDA achieved, as adjusted per terms of the contract, for the 12 months ended December 31, 2019 was below the earnout threshold for payout. As such, during the year ended June 30, 2020,estimated the fair value of the contingent consideration was updated to 0.  This determination of the earnout was finalized and agreed to with the former shareholders of the durable medical equipment businesses during the quarter ended December 31, 2020.

On December 29, 2020, in conjunction with the JPM Transactions, the Company issued HC LLC Series A-2 Preferred Stock to our consolidated subsidiary, Forest.  See Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.  An embedded derivative was identified in the instrument requiring bifurcation from the host instrument as a derivative to be carried at fair value.  The value of the derivative related to a participation feature upon the sale of the durable medical equipment business.  As of the issuance date, the fair value was determined using an option pricing model based on the transaction price.  The key assumption used in the option pricing model is a volatility rate of 72.7% and an option term of 3 years.  Subsequent to the issuance date, fair value of this derivative is determined using a discounted cash flow income approach and a guideline public company market approach.Monte Carlo simulation model. The key assumptions in applying the valuation approachMonte Carlo simulation model as of DecemberMarch 31, 2020 include financial2023 and June 30, 2022 included revenue forecasts, volatility of the durable medical equipment business,20.2% and 19.6%, respectively, and a discount rate of 17%7.75% and a discount for lack6.5%, respectively. As of marketabilityMarch 31, 2023, the contingent consideration of 33% (level 3 inputs in accordance with the GAAP fair value hierarchy).  The fair value of the embedded derivative as of both the issuance date and December 31, 2020$1.3 million was $6.5 million.  However, as the HC LLC Series A-2 Preferred Stock are issued to Forest, a consolidated subsidiary, the instruments and their effects on our operations have been eliminated in consolidation and therefore the valuation of the participation feature is reflected as 0included within the table above.  However, this valuation does impact our segment resultscurrent portion of related party payables and non-controlling interest accounts.

The Company is the owner of approximately 23.6% (or 5,425,644 shares) of the outstanding shares of GECC and values its ownership based on the NASDAQ-listed market price of GECC common stock (a Level 1 inputrelated party payables in accordance with the GAAP fair value hierarchy).

21


7. Fixed Assets

The Company’s fixed assets consist of its leased real estate assets, medical equipment held for rental, furniture and fixtures, and leasehold improvements used in its operations.  The following tables detail the Company’s fixed assets:

(in thousands)

 

December 31, 2020

 

 

June 30, 2020

 

Real Estate Assets

 

 

 

 

 

 

 

 

Buildings

 

$

43,355

 

 

$

43,355

 

Land and site improvements

 

 

9,170

 

 

 

9,170

 

Tenant improvements

 

 

3,500

 

 

 

3,500

 

 

 

 

56,025

 

 

 

56,025

 

Accumulated depreciation

 

 

(3,449

)

 

 

(2,837

)

Net carrying amount

 

$

52,576

 

 

$

53,188

 

 

 

 

 

 

 

 

 

 

Property and Equipment

 

 

 

 

 

 

 

 

Leasehold improvements

 

$

858

 

 

$

858

 

Vehicles

 

 

232

 

 

 

237

 

Computer equipment and software

 

 

356

 

 

 

277

 

Furniture and fixtures

 

 

394

 

 

 

417

 

Sleep study equipment

 

 

589

 

 

 

589

 

 

 

 

2,429

 

 

 

2,378

 

Accumulated depreciation

 

 

(1,297

)

 

 

(968

)

Net carrying amount

 

$

1,132

 

 

$

1,410

 

 

 

 

 

 

 

 

 

 

Medical Equipment Held for Rental

 

 

 

 

 

 

 

 

Medical equipment held for rental

 

$

14,054

 

 

$

13,828

 

Accumulated depreciation

 

 

(7,034

)

 

 

(6,345

)

Net carrying amount

 

$

7,020

 

 

$

7,483

 

The following table reconciles depreciation expense included in the following lines of the condensed consolidated statements of operations to total depreciation expense for each period presented.

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Depreciation and amortization

 

$

474

 

 

$

527

 

 

$

944

 

 

$

955

 

Cost of durable medical equipment rentals

 

 

1,457

 

 

 

1,962

 

 

 

3,205

 

 

 

4,013

 

Total depreciation expense

 

$

1,931

 

 

$

2,489

 

 

$

4,149

 

 

$

4,968

 

8. Goodwill and Other Intangible Assets

The Company’s investment management and real estate segments include identifiable intangible assets acquired through acquisitions in prior years.  In connection with the acquisition of the durable medical equipment businesses, the Company has also recognized goodwill and identifiable intangible assets associated with the tradenames and non-compete agreements.  The Company’s annual impairment assessment date for goodwill and other intangible assets is April 1.

Goodwill of $50.0 million presented on the condensed consolidated balance sheet consists only of the goodwill acquired as part of the acquisitions of the durable medical equipment businesses in September 2018 and June 2019.

22


The changes in the carrying value of goodwill are as follows:

 

 

For the six months ended December 31,

 

 

 

2020

 

 

2019

 

(in thousands)

 

 

 

 

 

 

 

 

Beginning balance

 

$

50,010

 

 

$

50,397

 

Purchase accounting adjustment

 

 

-

 

 

 

36

 

Ending balance

 

$

50,010

 

 

$

50,433

 

The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in thousands):

 

 

As of December 31, 2020

 

 

As of June 30, 2020

 

(in thousands)

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

Durable Medical Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradename

 

$

8,800

 

 

$

(2,053

)

 

$

6,747

 

 

$

8,800

 

 

$

(1,613

)

 

$

7,187

 

Non-compete agreements

 

 

1,360

 

 

 

(733

)

 

 

627

 

 

 

1,360

 

 

 

(573

)

 

 

787

 

 

 

 

10,160

 

 

 

(2,786

)

 

 

7,374

 

 

 

10,160

 

 

 

(2,186

)

 

 

7,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management agreement

 

 

3,900

 

 

 

(2,107

)

 

 

1,793

 

 

 

3,900

 

 

 

(1,887

)

 

 

2,013

 

Assembled workforce

 

 

526

 

 

 

(284

)

 

 

242

 

 

 

526

 

 

 

(255

)

 

 

271

 

 

 

 

4,426

 

 

 

(2,391

)

 

 

2,035

 

 

 

4,426

 

 

 

(2,142

)

 

 

2,284

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-place lease

 

 

6,028

 

 

 

(1,406

)

 

 

4,622

 

 

 

6,028

 

 

 

(1,157

)

 

 

4,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,614

 

 

$

(6,583

)

 

$

14,031

 

 

$

20,614

 

 

$

(5,485

)

 

$

15,129

 

Aggregate Amortization Expense (in thousands)

 

2020

 

 

2019

 

For the three months ended December 31,

 

$

547

 

 

$

603

 

For the six months ended December 31,

 

 

1,098

 

 

 

1,242

 

Estimated Future Amortization Expense (in thousands):

 

 

 

 

For the six months ending June 30, 2021

 

$

1,058

 

For the year ending June 30, 2022

 

 

1,981

 

For the year ending June 30, 2023

 

 

1,894

 

For the year ending June 30, 2024

 

 

1,702

 

For the year ending June 30, 2025

 

 

1,597

 

Thereafter

 

$

5,799

 

9. Lessor Operating Leases

Medical Equipment Leases

Through its majority-owned subsidiary DME Inc., and the subsidiaries of DME Inc., the Company owns medical equipment which is leased to customers.  The Company’s customers consist primarily of patients through their clinical providers including medical centers, clinics and hospices and the Company has lease arrangements with these patients.  In addition, the arrangements between the Company and its customers are impacted by arrangements between the Company and Payors.  The Payors may cover a portion or all of the rental payments under the agreements between the Company and its customers.  The patient is responsible for any residual co-payments.

23


The lease terms may be for a pre-determined time period, generally 10 months to 36 months; however, the customer may cancel the lease at any time and for any reason without penalty and therefore, the Company treats all leases as month-to-month leases.  Upon termination of the lease, the equipment, if not aged beyond its useful life, may be refurbished and subsequently sold or leased to another customer.  As the leases are month-to-month, there are no future lease receivables under the terms of the current leases.

Real Estate Leases

The Company’s majority-owned subsidiary CRIC IT Fort Myers LLC (Property Owner) owns a fee simple interest in 2 Class A office buildings, Gartner I and Gartner II (collectively, the Property).  The Property is fully leased, on a triple net basis, to Gartner, Inc. (Gartner) until March 31, 2030, which may be extended at the option of Gartner in accordance with the terms of the lease.  The Gartner I lease contains two five-year extensions and the Gartner II lease contains three five-year extensions (collectively, the Leases).  Under the terms of the Leases, the renewal rates are equal to 95% of the then fair market rent, and the tenant does not have a purchase option at the end of the lease term.  The leases require Gartner to make a base monthly lease payment of approximately $0.4 million as calculated on a straight-line basis over the remaining expected lease term plus additional rent payments for additional costs.  Additional rental payments are due for Property Owner costs, such as property taxes, management fees, and insurance costs, as incurred.  See Note 3 – Revenue for additional discussion of rental revenues.

The Property is subject to mortgage, security agreement and assignment of leases and rents with the senior and subordinated lenders, which is further described in Note 10 - Borrowings.  The Property Owner has assigned all rights, title and interest in and to the Property and the Leases to the senior and subordinated lenders and all amounts received are paid to a trust which funds the operating costs associated with the Property.  The Company does not have rights to these rent payments while the borrowings remain outstanding.

The Company expects to derive value from the residual value at the end of the existing lease term by further leasing the assets or through a sale transaction.

Rental income from real estate leases is summarized in the following table:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues from base rents

 

$

1,151

 

 

$

1,152

 

 

$

2,302

 

 

$

2,303

 

Revenues from additional rental payments

 

 

124

 

 

 

119

 

 

 

246

 

 

 

241

 

Total rental revenues

 

$

1,275

 

 

$

1,271

 

 

$

2,548

 

 

$

2,544

 

The following table summarizes the base rents for the remaining lease term:

(in thousands)

 

Base Rent Payments

 

For the six months ending June 30, 2021

 

$

2,124

 

For the year ending June 30, 2022

 

 

4,312

 

For the year ending June 30, 2023

 

 

4,419

 

For the year ending June 30, 2024

 

 

4,529

 

For the year ending June 30, 2025

 

 

4,648

 

Thereafter

 

 

24,025

 

Total base rent

 

$

44,057

 

24


10. Lessee Operating Leases

All of the Company’s leases are operating leases.  Certain of the leases have both lease and non-lease components.  The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets.  The following table provides additional details of the leases presented in the balance sheets:

(in thousands)

 

December 31, 2020

 

 

June 30, 2020

 

Facilities

 

 

 

 

 

 

 

 

Right of use assets

 

$

4,916

 

 

$

5,265

 

 

 

 

 

 

 

 

 

 

Current portion of lease liabilities

 

 

1,467

 

 

 

1,560

 

Lease liabilities, net of current portion

 

 

3,719

 

 

 

3,990

 

Total liabilities

 

$

5,186

 

 

$

5,550

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining life

 

3.8 years

 

 

3.9 years

 

Weighted-average discount rate

 

 

11.7

%

 

 

11.7

%

 

 

 

 

 

 

 

 

 

Vehicles

 

 

 

 

 

 

 

 

Right of use assets

 

$

52

 

 

$

61

 

 

 

 

 

 

 

 

 

 

Current portion of lease liabilities

 

 

20

 

 

 

20

 

Lease liabilities, net of current portion

 

 

32

 

 

 

41

 

Total liabilities

 

$

52

 

 

$

61

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining life

 

2.2 years

 

 

2.8 years

 

Weighted-average discount rate

 

 

12.3

%

 

 

12.3

%

 

 

 

 

 

 

 

 

 

Equipment

 

 

 

 

 

 

 

 

Right of use assets

 

$

47

 

 

$

66

 

 

 

 

 

 

 

 

 

 

Current portion of lease liabilities

 

 

31

 

 

 

37

 

Lease liabilities, net of current portion

 

 

16

 

 

 

29

 

Total liabilities

 

$

47

 

 

$

66

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining life

 

1.5 years

 

 

2.0 years

 

Weighted-average discount rate

 

 

12.5

%

 

 

12.5

%

sheet. As of December 31, 2020,June 30, 2022, the Company had remaining rightcontingent consideration of use assets of $5.0$1.1 million and lease liabilities of $5.3 million (consisting of $1.5 millionwas included within the related party payables in current portion of lease liabilities and $3.8 million in lease liabilities, net of current portion on the condensed consolidated balance sheet)sheet.

See Note 9 - Borrowings for additional discussion related to the leases discussed herein.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.

20


8. Real Estate under Development

Operating lease costs are includedIn January 2023, MBTS completed purchases of certain land parcels located in the operating expense associatedCanton, Mississippi, and Midway, Florida. Contemporaneously with the business segment leasingland purchases, MBTS entered into commercial lease agreements, as a lessor, in respect to the asset on the statements of operationsland parcels and are included in cash flows from operating activities on the statements of cash flows.�� 

25


Certain operating leases include variable lease costs which are not material and are included in operating lease costs.  Additional details are presented in the following table:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

549

 

 

$

519

 

 

$

1,079

 

 

$

1,047

 

Cash paid for operating leases

 

 

541

 

 

 

513

 

 

 

1,089

 

 

 

1,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vehicles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

7

 

 

$

7

 

 

$

14

 

 

$

14

 

Cash paid for operating leases

 

 

7

 

 

 

7

 

 

 

14

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

11

 

 

$

11

 

 

$

22

 

 

$

22

 

Cash paid for operating leases

 

 

11

 

 

 

11

 

 

 

22

 

 

 

22

 

The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases:

(in thousands)

 

 

 

 

For the six months ending June 30, 2021

 

$

1,127

 

For the year ending June 30, 2022

 

 

2,035

 

For the year ending June 30, 2023

 

 

1,386

 

For the year ending June 30, 2024

 

 

1,014

 

For the year ending June 30, 2025

 

 

531

 

Thereafter

 

 

424

 

Total lease payments

 

$

6,517

 

Imputed interest

 

 

(1,232

)

Total lease liabilities

 

$

5,285

 

Durable Medical Equipment

The facility leases include offices, retail and warehouse space and sleep labs.build-to-suit improvements to be constructed thereon. The leases have original or amended terms ranging from 12 to 96 months, somewill commence upon substantial completion of the build-to-suit development, which include an additional option to extend the lease for up to 120 months.  Certain of these leases have variable rental payments tied to a consumer price index or include additional rental payments for maintenance costs, taxes and insurance, which are accounted for as variable rent.

The vehicles leases have original lease terms of 60 months from the commencement date of each lease with no option to extend.  Each lease may be terminated by the lessee with 30-days’ notice afteris expected not later than the first 13 monthscalendar quarter of 2024. We intend to sell the lease subject to certain early termination costs, including residual value guarantees.  The lease costs include variable payments for taxesland and other fees.

Equipmentimprovements with the attached leases consist of office equipment with original lease terms ranging from 36 to 48 months from the commencement date of each lease and may include an option to extendat or purchase at the end of the lease term.  Certain of these leases include additional rental costs for taxes, insurance and additional fees in additionclose to the base rental costs.respective lease commencement date.

Investment ManagementDuring the three and General Corporate

The Company has a lease for office space located in Waltham, MA.  This office space is allocated between the investment management and general corporate segments.  On the commencement date of the lease, the non-cancellable term was for eighty-eightnine months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty-month period.

26


The lease payments commenced on October 1, 2017, four months afterended March 31, 2023, the Company began to occupycapitalized costs of $1.7 million within real estate under development (current) on its balance sheet, representing the space.  On an annual basis,cost of land and development and construction costs directly identifiable with the lease payments increase at an average ratetwo real estate projects.

9. Borrowings

As of approximately 2.4% from $28 to $32 thousand per month.

11. Borrowings

March 31, 2023, the Company did not have any outstanding related party borrowings. Related party borrowings of the Company’sCompany's subsidiaries as of June 30, 2022, are summarized in the following table:

(in thousands)

 

Subsidiaries

 

December 31, 2020

 

 

June 30, 2020

 

 

Borrower

June 30, 2022

 

Corbel Facility

 

DME Inc. and subsidiaries

 

$

-

 

 

$

25,106

 

GP Corp. Note

 

GP Corp.

 

 

3,072

 

 

 

3,072

 

Seller Note

 

GECM

$

6,270

 

Total principal

 

 

 

$

3,072

 

 

$

28,178

 

 

 

$

6,270

 

Unamortized debt issuance cost

 

 

 

 

-

 

 

 

(275

)

 

 

 

-

 

Total long-term related party notes payable

 

 

 

 

3,072

 

 

 

27,903

 

Total related party notes payable

 

 

 

 

6,270

 

Less current portion of related party notes payable

 

 

 

 

(76

)

 

 

(1,418

)

 

 

 

 

-

 

Related party notes payable, net of current portion

 

 

 

$

2,996

 

 

$

26,485

 

 

 

$

6,270

 

The Company’s and subsidiaries’ other outstanding borrowings are summarized in the following table:

(in thousands)

 

Subsidiaries

 

December 31, 2020

 

 

June 30, 2020

 

DME Revolver

 

DME Inc. and subsidiaries

 

$

-

 

 

$

3,900

 

Equipment Financing

 

DME Inc. and subsidiaries

 

 

1,877

 

 

 

2,230

 

Senior Note

 

CRIC IT

 

 

48,868

 

 

 

50,004

 

Subordinated Note

 

CRIC IT

 

 

4,098

 

 

 

3,803

 

Total principal

 

 

 

$

54,843

 

 

$

59,937

 

Unamortized debt premiums

 

 

 

 

3,262

 

 

 

3,251

 

Unamortized debt discounts and issuance costs

 

 

 

 

(1,867

)

 

 

(1,956

)

Total other outstanding borrowings

 

 

 

 

56,238

 

 

 

61,232

 

Less current portion of other outstanding borrowings

 

 

 

 

(4,168

)

 

 

(8,255

)

Other outstanding borrowings, net of current portion

 

 

 

$

52,070

 

 

$

52,977

 

(in thousands)

 

Borrower

March 31, 2023

 

June 30, 2022

 

GEGGL Notes

 

GEG

$

26,945

 

$

26,945

 

Total principal

 

 

$

26,945

 

$

26,945

 

Unamortized debt discounts and issuance costs

 

 

 

(1,208

)

 

(1,413

)

Long term debt

 

 

 

 

25,737

 

 

 

25,532

 

TheDuring the three and nine months ended March 31, 2023, the Company incurred interest expense of $1.3$0.6 million and $1.6$1.9 million, forrespectively, on related-party and other borrowings. During the three and nine months ended DecemberMarch 31, 20202022, the Company did not have any related-party or other borrowings. See Note 10 – Convertible Notes for interest expense on Convertible Notes and 2019, respectively.  The Company incurredNote 11 – Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries for interest expensesexpense on the preferred stock of $2.7 million and $3.3 million for the six months ended December 31, 2020 and 2019, respectively.subsidiaries.

27


The Company’s aggregate future required principal debt repayments are summarized in the following table:

(in thousands)

 

Principal Due

 

For the six months ending June 30, 2021

 

$

2,486

 

For the year ending June 30, 2022

 

 

3,107

 

For the year ending June 30, 2023

 

 

2,835

 

For the year ending June 30, 2024

 

 

2,982

 

For the year ending June 30, 2025

 

 

3,202

 

Thereafter

 

 

55,476

 

Total

 

$

70,088

 

 

 

 

 

 

Outstanding principal on related party borrowings

 

$

3,072

 

Outstanding principal on other borrowings

 

 

54,843

 

Future interest to be paid-in-kind

 

 

12,173

 

Total future required principal payments

 

$

70,088

 

(in thousands)

Principal Due

 

For the three months ending June 30, 2023

$

-

 

For the year ending June 30, 2024

 

-

 

For the year ending June 30, 2025

 

-

 

For the year ending June 30, 2026

 

-

 

For the year ending June 30, 2027

 

 

26,945

 

Thereafter

 

-

 

Total

$

26,945

 

21


Additional details of each borrowing by operating segment are discussed below.

Durable Medical EquipmentSeller 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, respectively, 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, we issued $26.9 million in aggregate principal amount of 7.25% notes due 2027 (the GEGGL Notes), which included $1.9 million of GEGGL Notes issued in connection with the acquisitionpartial exercise of 80.1%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; (ii) senior to any of DME Inc.,our indebtedness that expressly provides it is subordinated to the Company assumed aGEGGL Notes; (iii) effectively subordinated to any future secured note (indebtedness; and (iv) structurally subordinated to any future indebtedness and other obligations of any of our current and future subsidiaries. We pay interest on the GEGGL Notes on March 31, June 30, September 30 and December 31 of each year. The GEGGL Notes will mature on Corbel FacilityJune 30, 2027). 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 principal balancenet consolidated debt to equity ratio of $8.5 million, which was amended2:1. As of March 31, 2023 our net consolidated debt to equity ratio is -0.29:1.00.

10. Convertible Notes

As of March 31, 2023 and increased to $25 million concurrent withJune 30, 2022, the closing of the first acquisition of the durable medical equipment businesses.  In addition, the Company assumed and expanded a revolving line of credit agreement (DME Revolver) with a principal balance of $0.8 million, which was amended and increased to $6.3 million at the date of acquisition.

The Company amended and borrowed an additional $3.4 million under the Corbel Facility in June 2019.  The remainingtotal outstanding principal balance of $24.8 millionconvertible notes due on February 26, 2030 (the Convertible Notes) was repaid on December 29, 2020.  The repayment included deferred structuring fees of $0.6 million, prepayment premiums and settlement fees of $1.0$37.0 million and lender legal fees of $0.1 million.  In addition, upon repayment, the Company wrote off the remaining unamortized debt issuance costs of $0.2$36.1 million, resulting in an aggregate $1.9 million loss on extinguishment of debt.

The Corbel Facility was held by Corbel, a related party, which also holds a non-controlling interest in DME Inc. and HC LLC Series A-1 Preferred Stock.  See Note 5 – Related Party Transactions and Note 14 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

Principal payments and interest expense incurred on the Corbel Facility are summarized in the following table:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Principal payments

 

$

24,752

 

 

$

355

 

 

$

25,106

 

 

$

1,316

 

Interest expense

 

 

635

 

 

 

1,603

 

 

 

1,296

 

 

 

2,458

 

The DME Revolver had a balance of $0.0 million at December 31, 2020 and allows for borrowings up to $10 million, subject to a fixed percentage of qualifying accounts receivables and inventories related to the durable medical equipment business operations.  Borrowings under the line of credit are due on November 29, 2022 and accrue interest at a variable rate of the prime rate plus 0.4% per annum.  At December 31, 2020 the interest rate was 3.7%.  Interest is payable monthly in arrears.  The Company has the option to prepay the borrowings without any penalty.  The Company has classified all borrowings under the DME Revolver as long-term in the condensed consolidated balance sheets as of December 31, 2020 based on the maturity date of the facility.

The borrowings under the DME Revolver are collateralized by the assets of the durable medical equipment business and DME Inc. is required to meet certain financial covenants.

28


The DME Revolver includes covenants that restrict DME Inc. business operations to its current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions.  Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of DME Inc.  DME Inc. must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the DME Inc. EBITDA levels.  The DME Revolver are non-recourse to the Company.

DME Inc’s operating subsidiaries also utilize equipment financing debt to fund certain inventory and equipment purchases from suppliers.  These equipment financing debt agreements are entered into with 3rd party banks and are generally payable in equal installments over terms of one to three years, depending on the nature of the underlying purchases being financed.  The debt is secured by the inventory and equipment, as applicable, of the operating subsidiaries entering into the agreements, and the long-term agreements have implicit interest rates between 7 – 8%.  During the six months ended December 31, 2020 and 2019, the Company financed $1.6 million and $1.3 million, respectively, in inventory and equipment through such financing agreements.

Investment Management

The GP Corp. Note matures in November 2026, accrues interest at a variable rate of three-month LIBOR plus 3.0% per annum and is secured by a profit sharing agreement related to GECM’s management of GECC.  At December 31, 2020 the interest rate was 3.2%.  The GP Corp. Note requires quarterly interest only payments and annual principal payments of $0.08 million each June 30.

The GP Corp. Note is non-recourse to any of the Company’s operations or net assets not related to GECM’s management services to GECC.  The GP Corp. Note may be prepaid at par value at any time with prior written notice to the holders of the GP Corp. Note.  Additionally, GECC GP Corp. is required to prepay the GP Corp. Note upon certain material liquidation transactions including any termination of the Profit Sharing Agreement.

The GP Corp. Note is held by MAST Capital, a related party.  Payments and interest expense incurred on the GP Corp. Note are summarized in the following table:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Principal payments

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Interest expense

 

 

25

 

 

 

44

 

 

 

51

 

 

 

88

 

Real Estate

In connection with the acquisition of the real estate business, the Company’s majority-owned subsidiary, CRIC IT, assumed a senior secured note (Senior Note) with a principal balance of $54.8 million and a subordinated note (Subordinated Note) with a principal balance of $2.7 million at the date of acquisition both due to Wells Fargo Bank Northwest, National as trustee.  The Senior Note was recorded at an estimated fair value of $52.2 million, reflecting a discount of $2.6 million from the face amount; and the Subordinated Note was recorded at $5.8 million, reflecting a premium of $3.1 million.  The discount and premium amortize over the life of the notes.

The Senior Note matures on March 15, 2030, accrues interest at a rate of 3.49% per annum and is secured by a first lien mortgage on the Property and an Assignment of Leases and Rents.  The Senior Note requires monthly principal and interest payments through the maturity date, with the last payment of $18.4 million on March 15, 2030.  The principal and interest due on the Senior Note may be prepaid at the option of the borrower, based on an amount determined by discounting the remaining principal and interest payments at a rate equal to an applicable premium in excess of a rate corresponding to the specified U.S. Treasury security over the remaining average life of the Senior Note.

29


The Subordinated Note matures on March 15, 2030, accrues interest at a rate of 15.0% per annum, and is secured by a second lien mortgage on the Property and an Assignment of Leases and Rents.  The Subordinated Note is a capital appreciation note, whereby the monthly interest is capitalized to the principal balance and due at maturity.  Accordingly, a $16.3 million payment is due on March 15, 2030.  The principal and interest due on the Subordinate Note may be prepaid at the option of the borrower, based on an amount determined by discounting the remaining principal and interest payments at a rate equal to an applicable premium in excess of a rate corresponding to the specified U.S. Treasury security over the remaining average life of the Subordinated Note.

The note agreements include negative covenants that restrict the Property Owner’s business operations to ownership and lease of the Property, limit additional indebtedness, require maintenance of insurance and other customary requirements related to the Property.  Events of default include non-payment of amounts when due, inability to pay indebtedness or material change in the business operations or financial condition of the Property Owner or the lease tenant that in the Lender’s reasonable determination would reasonably be expected to materially impair the value of the Property, prevent timely repayment of the notes or performance of any material obligations under the note and related agreements.  The payments under the notes are also guaranteed on a full and several basis by the non-controlling interest holder of the Property Owner.  Both the Senior Note and Subordinated Note are non-recourse to the Company, but are secured by the Property, the rights associated with the Leases and the stock owned by the Company in the Property Owner.  See Note 9 – Lessor Operating Leases.

12. Convertible Notes

On February 26, 2020, the Company issued Convertible Notes at par with an aggregate principal balance of $30 million due February 26, 2030 (the Convertible Notes).  As of December 31, 2020 the total principal balance of Convertible Notes outstanding was $31.3 million including cumulative interest paid-in-kind.paid in-kind. The Convertible Notes are held by a consortium of investors, including $13.6$15.0 million issued to certain related parties.  Such Convertible Notes issued to related parties include:as of March 31, 2023.

$6.3 million issued to entities associated with Matthew A. Drapkin, including funds managed by Northern Right Capital Management, L.P, a significant shareholder.  Mr. Drapkin, a member of the Company’s board of directors, is the Chief Executive Officer of Northern Right Capital Management, L.P.

$6.7 million issued to entities associated with Jason W. Reese, including funds managed by ICAM, a significant shareholder.  Jason W. Reese, the Executive Chairman of the Company’s board of directors, is the Chief Executive Officer of ICAM.

$0.7 million issued to entities associated with Eric J. Scheyer, a member of the Company’s board of directors.

The Convertible Notes accrue interest at 5.0%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. Each $1,000 principal amount of the Convertible Notes are 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 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. However, due to a Company option to settle any conversion request by holders prior to July 1, 2020 in either cash or in shares, the conversion option is bifurcated and recorded to additional paid-in-capital within equity, creating a debt discount.  In valuing the conversion option, we estimated that the yield on an identical non-convertible instrument would be 12.5%, resulting in a debt discount of $12.6 million.  The Company incurred $1.2$1.2 million in issuance costs which were allocated ratably betweenon the debt and equity portions of the instrument.  Both the debt discount andoriginal issuance. The debt issuance costs are being amortized over the 10-year Convertible Notes10-year term and are netted with the principal balance within convertible debt on our condensed consolidated balance sheet.sheets. As of March 31, 2023 and June 30, 2022, the remaining balance of unamortized debt issuance costs was $0.8 million and $0.9 million, respectively.

3022


TheDuring the three and nine months ended March 31, 2023, the Company incurred interest expense of $0.6$0.5 million and $1.1$1.5 million, respectively, related to the convertible notes forConvertible Notes, inclusive of non-cash interest related to amortization of debt issuance costs. During the three and sixnine months ended DecemberMarch 31, 2020.

13. CARES Act

On March 27, 2020,2022, the Coronavirus Aid, Relief,Company incurred interest expense of $0.4 million and Economic Security Act ($CARES Act1.3) was passed into law.  Section 1102 of the CARES Act, the Paycheck Protection Program Loan (PPP Loan) provided additional funding for small businesses, as defined by the Small Business Act, to keep workers employed during through the COVID-19 crisis.  In April 2020, our majority-owned subsidiary DME Inc. applied for and received $3.6 million, in PPP Loans.  Proceeds can only be used for specified covered purposes including payroll, rent and utilities in accordance with the CARES Act.  The PPP Loan has a two year term and bears interest at a rate of 1% per annum.  To the extent proceeds are used for these covered purposes, some or all of therespectively, related principal balances may be forgiven.  Monthly principal and interest payments are deferred until the U.S. Small Business Administration (SBA) has remitted the loan forgiveness amount to the lender.  The PPP Loan may be prepaid at any time priorConvertible Notes, inclusive of non-cash interest related to maturity with no prepayment penalties.  Between funding and June 30, 2020, the Company spent these proceeds on covered purposes and recognized the proceeds as a reduction to operating expenses.  The Company has submitted a forgiveness application to the U.S. Small Business Administration seeking full forgivenessamortization of the PPP Loan.  The eligibility requirement of the PPP Loan is subjective, and if determined that we were ineligible to receive the PPP Loan we could be required to pay the PPP Loan in its entirety.debt issuance costs.

Additionally, pursuant to the CARES Act, Congress appropriated $100 billion in relief funds for hospitals and healthcare providers through grants administered by the U.S. Department of Health and Human Services (HHS).  Qualified providers of healthcare, services and support may receive HHS grants for healthcare-related expenses or lost revenue due to the COVID-19 pandemic.  Retention and use of the HHS grants are subject to certain terms and conditions including that such grant funds may only be used to prevent, prepare for, and respond to COVID-19 and such grant funds will reimburse only healthcare-related expenses or lost revenues that are attributable to the COVID-19 pandemic.   If these terms and conditions are met, HHS grants do not need to be repaid.  In April 2020, subsidiaries of DME Inc. received $1.4 million in HHS grants to continue providing health care treatment to patients during the COVID-19 pandemic.  Between funding and June 30, 2020, the Company used these funds as authorized by the HHS grant and recognized the proceeds as a reduction to operating expenses. We will continue to monitor our compliance with the terms and conditions of the HHS grant and any additional requirements if and when they become applicable.

We have accounted for such proceeds as in-substance government grants by analogizing to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance.

14.11. Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries

Non-Controlling Interests of Subsidiaries

Holders of non-controlling interests (NCI) 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 interests of subsidiaryinterest balances on the condensed consolidated balance sheets:

(in thousands)

 

December 31, 2020

 

 

June 30, 2020

 

 

March 31, 2023

 

June 30, 2022

 

DME Inc.

 

 

 

 

 

 

 

 

HC LLC

 

 

 

 

 

Temporary equity

 

 

2,567

 

 

 

3,890

 

 

 

-

 

 

 

2,225

 

Permanent equity

 

 

2,567

 

 

 

3,890

 

 

 

-

 

 

 

2,225

 

Total DME Inc.

 

 

5,134

 

 

 

7,780

 

GP Corp.

 

 

 

 

 

 

 

 

Permanent equity

 

 

(840

)

 

 

(782

)

GE FM Holdings

 

 

 

 

 

 

 

 

Total HC LLC

 

 

-

 

 

 

4,450

 

Consolidated Fund

 

 

 

 

 

Permanent equity

 

 

808

 

 

 

778

 

 

 

-

 

 

 

642

 

Forest

 

 

 

 

 

 

 

 

 

 

 

 

 

Permanent equity

 

 

2,700

 

 

 

-

 

 

 

-

 

 

 

3,666

 

Total Non-controlling interests

 

$

7,802

 

 

$

7,776

 

Total non-controlling interests

 

$

-

 

 

$

8,758

 

31


The following table summarizes the net (loss) income (loss) attributable to the non-controlling interests on the condensed consolidated statements of operations:

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

DME Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HC LLC

 

 

 

 

 

 

 

 

 

Temporary equity

 

 

(292

)

 

 

(78

)

 

 

(337

)

 

 

(158

)

 

 

-

 

 

 

(686

)

 

 

752

 

 

 

(377

)

Permanent equity

 

 

(292

)

 

 

(78

)

 

 

(337

)

 

 

(158

)

 

 

-

 

 

 

(686

)

 

 

752

 

 

 

(377

)

Total DME Inc.

 

 

(584

)

 

 

(156

)

 

 

(674

)

 

 

(316

)

GP Corp.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total HC LLC

 

 

-

 

 

 

(1,372

)

 

 

1,504

 

 

 

(754

)

GEC GP

 

 

 

 

 

 

 

 

 

Permanent equity

 

 

(30

)

 

 

(43

)

 

 

(60

)

 

 

(85

)

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

(7

)

GE FM Holdings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Fund

 

 

 

 

 

 

 

 

 

Permanent equity

 

 

17

 

 

 

13

 

 

 

30

 

 

 

26

 

 

 

-

 

 

 

(95

)

 

 

(8

)

 

 

(146

)

Forest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Permanent equity

 

 

0

 

 

 

-

 

 

 

0

 

 

 

-

 

 

 

-

 

 

 

1,244

 

 

 

(1,546

)

 

 

1,066

 

Total

 

$

(597

)

 

$

(186

)

 

$

(704

)

 

$

(375

)

Total net (loss) income attributable to non-controlling interest

 

$

-

 

 

$

(226

)

 

$

(50

)

 

$

159

 

23


HC LLC – Non-controlling interest in DME Inc. classified as temporary equity

In connection with the acquisition of the durable medical equipment businesses in September 2018, theThe Company issued a 9.95%9.95% common stock equity ownership in DME Inc.HC LLC. The holder of the interest has ahad board observer rights for the DME Inc.HC LLC board of directors, but no voting rights. DME Inc. hasHC LLC had the right of first offer if the holder desiresdesired to sell the security and in the event of a sale of DME Inc.,HC LLC, the holder mustwas obligated to sell their securities (drag along rights) and hashad the right to participate in sales of DME Inc.HC LLC securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder ownsowned at least 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of DME Inc. hasHC LLC had not commenced and (iii) the holder hashad not had an earlier opportunity to sell its shares at their fair market value, the holder hashad the right to request a marketing process for a sale of DME Inc.HC LLC and hashad the right to put its common shares to DME Inc.HC LLC at the price for such shares implied by such marketing process. The Company also hashad the right to call the holder’s common shares at such price. The holder of the non-controlling interest iswas entitled to participate in earnings of DME Inc.HC LLC and iswas not required to fund losses. As the redemption iswas contingent upon future events outside of the Company’s control which arewere not probable, the Company has classified the non-controlling interest as temporary equity andat its fair value on the date of issuance, adjusted for any earnings in DME Inc.

The holderHC LLC. As of thisMarch 31, 2023, no non-controlling interest Corbel, is alsowas outstanding following the holderSale of HC LLC on January 3, 2023. Refer to Note 4 - Assets and Liabilities Held for Sale and Discontinued Operations for details on the Series A-1 Preferred Stock and previously was the holderSale of the HC LLC to Quipt.Corbel Facility.  See Note 5

HC LLCRelated Party Transactions and Note 10 – Borrowings.

Non-controlling interest in DME Inc. classified as permanent equity

In connection with the acquisition of the durable medical equipment businesses in September 2018, theThe Company issued one of the former owners, a 9.95%9.95% common stock equity ownership in DME Inc.HC LLC. The rights arewere consistent with the non-controlling interest classified as temporary equity, other than the holder does not havehaving a contingent put right. Accordingly, the Company has classified the non-controlling interest as permanent equity at its fair value on the date of issuance, adjusted for any earnings in DME Inc.HC LLC. As of March 31, 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.

GECCGEC GP Corp. – Non-controlling interest classified as permanent equity

In connectionGEC 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 acquisition ofassets acquired from MAST Capital Management, LLC. During the investment management business in November 2016,three months ended March 31, 2022, the Company issued certain affiliates and employeespurchased the remaining shares of the Company a 19.9%GEC GP. As of March 31, 2023, no non-controlling interest in GP Corp.was outstanding.

GE FM Holdings – Non-controlling interest classified as permanent equity

In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a 19.9% interest in GE FM Holdings.

32


Forest – Non-controlling interest classified as permanent equity

In connection with the JPM Transactions on December 29, 2020, the Company sold to JPM a 20.0%20.0% common stock interest in Forest in exchange for $2.7$2.7 million. JPM has a representative onAs of March 31, 2023, no non-controlling interest was outstanding following the Sale of Controlling Interest in Forest. See Note 3 - Forest boardNote and Transactions with JPM.

Consolidated Fund – Non-controlling interest classified as permanent equity

As of directors andJune 30, 2022, the right to designate a numberCompany held 73.4% of directors commensurate with their common stock ownership interest.  Forest has the right of first offer if the holder desires to sell the security andcapital in the event ofConsolidated Fund. The remaining capital in the Consolidated Fund was recorded as a sale of Forest, the holder must sell their securities (drag along rights) and has the right to participate in sales of Forest securities (tag along rights).  The holder of the non-controlling interest is entitledthat included affiliated individuals and entities. In July 2022, the Consolidated Fund ceased operations and distributed its remaining assets to participatenon-controlling interests in earningsthe total amount of Forest and is not required to fund losses.$0.6 million.

The holder of this non-controlling interest, JPM, is also the holder of Forest Preferred Stock discussed below.  See Note 5 – Related Party Transactions.  24


Redeemable Preferred Stock of Subsidiaries

The following table summarizes the preferred stock of subsidiary balances on the condensed consolidated balance sheets:

(in thousands)

 

December 31, 2020

 

 

June 30, 2020

 

HC LLC

 

 

 

 

 

 

 

 

Series A-1 Preferred Stock

 

 

1,556

 

 

 

-

 

Series A-2 Preferred Stock

 

 

-

 

 

 

-

 

Total HC LLC

 

 

1,556

 

 

 

-

 

Forest

 

 

 

 

 

 

 

 

Forest Preferred Stock

 

 

33,856

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total preferred stock classified as liability

 

$

35,412

 

 

$

-

 

HC LLC - Series A-1Forest Preferred Stock classified as a liability

In connection with the JPM Transactions, the CompanyOn December 29, 2020, Forest issued 10,09035,010 shares of Series A-1 Preferred Stockpreferred stock in Forest with a face value of $1,000$1,000 per share at issuance.issuance (Forest Preferred Stock). The preferred shares were issued pro-rata to the stockholders of DME Inc. in the form of a distribution and 0 consideration was provided in exchange for such instruments.  The shares provide for a 9%9% annual dividend, which iswas payable quarterly. TheAs the preferred shares arewere mandatorily redeemable by the Company at their face value of $1,000$1,000 per share on the earlier of certain redemption events or December 29, 2027.  The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business.  The shares are redeemable at any time at the option of Company at a redemption price equal to face value.  The shares rank senior and have preference to the common shares of HC LLC.  The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights.

As the shares of Series A-1 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet.  The dividends on the shares are included in interest expense in the consolidated statement of operations.

The fair value of each share of Series A-1 Preferred Stock on the issuance date was determined to be $801 per share.  The difference between the fair value and the redemption value of $1,000 per share as well as debt issuance costs of $0.2 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7-year period to redemption using the effective interest method.

The holders of the Series A-1 Preferred Stock include our majority-owned consolidated subsidiary Forest (8,082 shares), as well as Corbel and VHG (each 1,004 shares), who are also the holders of non-controlling interests in DME Inc. discussed above.  See Note 5 – Related Party Transactions.  Such shares of Series A-1 Preferred Stock issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation.

33


HC LLC Series A-2 Preferred Stock classified as a liability

In connection with the JPM Transactions, the Company issued 34,010 shares of Series A-2 Preferred Stock with a face value of $1,000 per share at issuance.  The shares were issued to Forest in exchange for cash equal to the face value of such shares.  The shares provide for a 9% annual dividend, which is payable quarterly.  The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3%0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027.  The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business.  The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place.  The shares rank senior and have preference to the common shares of HC LCC.  The shares are non-voting and contain standard protective rights.  In addition, upon a sale of the durable medical equipment business, the holders of HC LLC Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale.

As the shares of Series A-2 Preferred Stock are mandatorily redeemable at a specified date,2027, the security has beenwas classified as a liability in the condensed consolidated balance sheet.  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.

The dividends on the shares areForest Preferred Stock were included in interest expense in the condensed consolidated statementstatements of operations.

We have identified During the feature allowing holdersnine months ended March 31, 2023, the Company recorded interest expense, inclusive of the HC LLC Series A-2 Preferred Stocknon-cash interest related to participate in up to 33%amortization of proceeds arising from a sale of the durable medical equipment business as an embedded derivative.  We have bifurcated this embedded derivative from the mandatorily redeemable preferred stock hostdiscounts and have recorded the derivative liability at fair value.  The fair value of the derivative liability on the issuance date was $6.5 million, and will be marked to fair value at each reporting date going forward.  The fair value of each share of Series A-2 Preferred Stock on the issuance date was determined to be $810 per share.  The difference between the fair value and the redemption value of $1,000 per share as well as debt issuance costs, of $1.1$1.7 million is accounted for as a debt discount and accretion of the discount will be chargedrelated to Forest Preferred Stock. No interest expense overwas recorded during the 7-year period to redemption usingthree months ended March 31, 2023 following the effective interest method.  

The holderSale of the Series A-2 Preferred Stock is our majority-owned consolidated subsidiary Forest.  Such shares and related embedded derivatives issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation.

Forest Preferred Stock classified as a liability

In connection with the JPM Transactions, Forest issued 35,010 shares of preferred stockControlling Interest in Forest with a face value of $1,000 per share at issuance.  The preferred shares were sold to JPM in exchange for cash equal toon December 30, 2022. During the face value of such shares.  The preferred shares provide for a 9% annual dividend, which is payable quarterly.  The preferred shares are mandatorily redeemable bythree and nine months ended March 31, 2022, 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 redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than $300 million.  The preferred shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place.  The preferred shares rank senior and have preference to the common shares of Forest.  The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.  

As the preferred shares are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet.  The dividends on the preferred stock are included inrecorded interest expense, in the consolidated statementinclusive of operations.

The fair valuenon-cash interest related to amortization of each share of Forest Preferred Stock on the issuance date was determined to equal its face value based on the transaction price.  Debtdiscounts and debt issuance costs, of $1.2$0.8 million is accounted for as a debt discount and accretion of the discount will be charged$2.5 million, respectively, related to interest expense over the 7-year period to redemption using the effective interest method.

The holder of the Forest Preferred Stock is JPM, who is also the holder of the non-controlling interests in Forest discussed above.  See Note 5 – Related Party Transactions.Stock.

34


15.12. Stockholders’ Equity

Restricted Stock Awards (Performance Shares) and Restricted Stock Units

Restricted stock awards have vesting terms between 1-3 years and are subject to service requirements. During the sixthree and nine months ended DecemberMarch 31, 2020, there were 0 awards or forfeitures of2023, the Company granted 563,351 and 963,299 restricted stock awards, included in the below table and 732,909 remain outstanding as of December 31, 2020.  Restricted stock awards granted have both performance and service requirements in connection with the formation of the investment management business.  The vesting of these awards is subject to a five-yearrespectively. service requirement and an investment management cumulative revenue collection target of $40 million for the five-year period ended November 3, 2021.  In order to recognize compensation expense over the vesting period, the Company estimates the probability of the performance target being met on an on-going basis.  As of December 31, 2020, the Company estimates that approximately 243,322 of the restricted stock awards are probable of vesting under the performance condition.

Restricted stock units are subject to service requirements. During the three and nine months ended March 31, 2023 the Company did not grant any shares of restricted stock units.

The Company accounts for forfeitures of the restricted stock awards and restricted stock units in the period incurred.  During the three and six months ended December 31, 2020 the Company granted 0 and 44,490 shares of restricted stock units, respectively, to employees and directors.occurred.

The activity of the Company’s restricted stock awards and restricted stock units for the sixnine months ended DecemberMarch 31, 20202023 was as follows:

Restricted Stock Awards and Restricted Stock Units

 

Restricted Stock

(in thousands)

 

 

Weighted Average Grant Date Fair Value

 

 

Restricted Stock
(in thousands)

 

 

Weighted Average Grant Date Fair Value

 

Outstanding at June 30, 2020

 

 

941

 

 

$

3.71

 

Outstanding at June 30, 2022

 

 

1,312

 

 

$

1.79

 

Granted

 

 

44

 

 

 

2.36

 

 

 

963

 

 

 

2.20

 

Vested

 

 

(161

)

 

 

2.66

 

 

 

(581

)

 

 

2.15

 

Forfeited

 

 

-

 

 

 

-

 

 

 

(5

)

 

 

3.07

 

Outstanding at December 31, 2020

 

 

824

 

 

$

3.84

 

Outstanding at March 31, 2023

 

 

1,689

 

 

$

1.90

 

25


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 March 31, 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 nine months ended March 31, 2023.

Stock Options

The following table summarizes the Company’s option award activity as of and through Decemberduring the nine months ended March 31, 2020:2023:

Options

 

Shares

(in thousands)

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate Intrinsic Value

(in thousands)

 

Outstanding at June 30, 2020

 

 

2,475

 

 

$

3.69

 

 

 

5.51

 

 

$

-

 

Options granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

2,475

 

 

$

3.69

 

 

 

5.01

 

 

$

-

 

Exercisable at December 31, 2020

 

 

1,798

 

 

$

3.64

 

 

 

4.53

 

 

$

-

 

Vested and expected to vest as of December 31, 2020

 

 

2,475

 

 

$

3.69

 

 

 

5.01

 

 

$

-

 

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

 

 

125

 

 

 

3.60

 

 

 

-

 

 

 

-

 

Forfeited, cancelled or expired

 

 

(988

)

 

 

3.63

 

 

 

-

 

 

 

-

 

Outstanding at March 31, 2023

 

 

1,271

 

 

$

3.72

 

 

 

4.19

 

 

$

-

 

Exercisable at March 31, 2023

 

 

1,439

 

 

$

3.71

 

 

 

4.20

 

 

$

-

 

Vested and expected to vest as of March 31, 2023

 

 

1,271

 

 

$

3.72

 

 

 

4.19

 

 

$

-

 

During the three and nine months ended DecemberMarch 31, 2020 and 2019,2023, the Company recognized total stock-based compensation expense associated with all restricted stock and stock options of $0.3$0.6 million and $0.2$2.0 million, respectively. During the sixthree and nine months ended DecemberMarch 31, 2020 and 2019,2022, the Company recognized total stock-based compensation expense associated with all restricted stock and stock options of $0.7$0.5 million and $0.3$2.2 million, respectively.

As of DecemberMarch 31, 2020,2023, the Company had unrecognized compensation costs associatedrelated to all unvested restricted stock awards and stock options totaling $2.5 million.

During the nine months ended March 31, 2023, the Company issued compensation to certain employees in the form of GECC common shares to be settled with outstanding stockGECC shares currently held by the Company. The total value of GECC shares awarded for the nine months ended March 31, 2023 was $0.4 million, of which $0.1 million vested immediately, and stock-linked awards totaled approximately $1.7 million.the balance will vest annually pro-rata over a three year period. Related compensation expense was $0.1 million and $0.3 million for the three and nine months ended March 31, 2023, respectively.

35During the three and nine months ended March 31, 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 three and nine months ended March 31, 2023 was $0.1 million, which will vest on the third anniversary of the grant date. Related compensation expense was $11 thousand for the three and nine months ended March 31, 2023.


16.13. Income TaxTaxes

As of June 30, 2020,2022, the Company had net operating loss (NOL) and capital loss carryforwards for federal and state income tax purposes of approximately $1.5 billion$821 million. Following the Sale of Controlling Interest in Forest, the Forest entity ceased being part of our consolidated tax group and $203NOL carryforwards attributed to Forest generally became unavailable for the Company's use going forward. The Company retained approximately $154 million respectively.  Theof the federal carryforwards available to the Company as of June 30, 2022. Of these, approximately $139 million of federal NOL carryforwards generated prior to fiscal year 2018 will expire from 20212023 through 2037.  The federal2025 (including approximately $131 million that will expire on June 30, 2023). Federal NOL carryforwards generated in fiscal year 2018 or later of approximately $7 million can be carried forward indefinitely. The state NOLCapital loss carryforwards will expire from 2029of approximately $8 million can be carried forward through 2038.  The Company assesses NOL carryforwards based on taxable income on an annual basis.2027.

26


In light of the Company’s 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.

17.The Inflation Reduction Act (IRA) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on "adjusted financial statement income" for applicable corporations and a 1% excise tax on repurchases of stock. These provisions are effective for tax years beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position when it becomes effective.

14. 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 other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

18. Segment Information

The Company allocates resources based on 3 business operating segments: durable medical equipment, investment management and real estate with general corporate representing unallocated costs and activity to arrive at consolidated operations.  Activity not allocated to the segments include, but are not limited to, certain investment and financing activities, professional fees, costs associated with being a public company, acquisition costs and costs associated with executive and corporate management departments, including compensation, benefits, rent and insurance.

The following tables illustrate results of operations by segment:

 

 

For the three months ended December 31, 2020

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Intercompany Eliminations(1)

 

 

Consolidated Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

14,543

 

 

$

760

 

 

$

1,276

 

 

$

45

 

 

$

(45

)

 

$

16,579

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

(4,703

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,703

)

Cost of durable medical equipment rentals

 

 

(1,621

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,621

)

Depreciation and amortization

 

 

(462

)

 

 

(127

)

 

 

(431

)

 

 

(1

)

 

 

-

 

 

 

(1,021

)

Stock-based compensation(2)

 

 

-

 

 

 

(197

)

 

 

-

 

 

 

(88

)

 

 

-

 

 

 

(285

)

Transaction costs(3)

 

 

(87

)

 

 

-

 

 

 

-

 

 

 

(229

)

 

 

-

 

 

 

(316

)

Other selling, general and administrative

 

 

(8,028

)

 

 

(719

)

 

 

(127

)

 

 

(1,006

)

 

 

45

 

 

 

(9,835

)

Total operating expenses

 

 

(14,901

)

 

 

(1,043

)

 

 

(558

)

 

 

(1,324

)

 

 

45

 

 

 

(17,781

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(687

)

 

 

(25

)

 

 

(647

)

 

 

(552

)

 

 

-

 

 

 

(1,911

)

Other income (expense)

 

 

(1,833

)

 

 

-

 

 

 

-

 

 

 

3,950

 

 

 

-

 

 

 

2,117

 

Total other expense, net

 

 

(2,520

)

 

 

(25

)

 

 

(647

)

 

 

3,398

 

 

 

-

 

 

 

206

 

Total pre-tax income (loss)

 

$

(2,878

)

 

$

(308

)

 

$

71

 

 

$

2,119

 

 

$

-

 

 

$

(996

)


 

 

For the three months ended December 31, 2019

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Intercompany Eliminations(1)

 

 

Consolidated Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

14,391

 

 

$

889

 

 

$

1,271

 

 

$

57

 

 

$

(57

)

 

$

16,551

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

(3,689

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,689

)

Cost of durable medical equipment rentals

 

 

(2,185

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,185

)

Depreciation and amortization

 

 

(520

)

 

 

(179

)

 

 

(430

)

 

 

(1

)

 

 

-

 

 

 

(1,130

)

Stock-based compensation(2)

 

 

-

 

 

 

(98

)

 

 

-

 

 

 

(110

)

 

 

-

 

 

 

(208

)

Transaction costs(3)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(486

)

 

 

-

 

 

 

(486

)

Other general and administrative

 

 

(7,736

)

 

 

(566

)

 

 

(126

)

 

 

(752

)

 

 

57

 

 

 

(9,123

)

Total operating expenses

 

 

(14,130

)

 

 

(843

)

 

 

(556

)

 

 

(1,349

)

 

 

57

 

 

 

(16,821

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(937

)

 

 

(41

)

 

 

(655

)

 

 

-

 

 

 

-

 

 

 

(1,633

)

Other income (expense)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(223

)

 

 

-

 

 

 

(223

)

Total other expense, net

 

 

(937

)

 

 

(41

)

 

 

(655

)

 

 

(223

)

 

 

-

 

 

 

(1,856

)

Total pre-tax income (loss)

 

$

(676

)

 

$

5

 

 

$

60

 

 

$

(1,515

)

 

$

-

 

 

$

(2,126

)

 

 

For the six months ended December 31, 2020

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Intercompany Eliminations(1)

 

 

Consolidated Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

29,153

 

 

$

1,533

 

 

$

2,548

 

 

$

136

 

 

$

(136

)

 

$

33,234

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

(8,910

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,910

)

Cost of durable medical equipment rentals

 

 

(3,536

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,536

)

Depreciation and amortization

 

 

(925

)

 

 

(255

)

 

 

(861

)

 

 

(1

)

 

 

-

 

 

 

(2,042

)

Stock-based compensation(2)

 

 

-

 

 

 

(391

)

 

 

-

 

 

 

(323

)

 

 

-

 

 

 

(714

)

Transaction costs(3)

 

 

(87

)

 

 

-

 

 

 

-

 

 

 

(261

)

 

 

-

 

 

 

(348

)

Other selling, general and administrative

 

 

(15,799

)

 

 

(1,251

)

 

 

(252

)

 

 

(2,152

)

 

 

136

 

 

 

(19,318

)

Total operating expenses

 

 

(29,257

)

 

 

(1,897

)

 

 

(1,113

)

 

 

(2,737

)

 

 

136

 

 

 

(34,868

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,396

)

 

 

(51

)

 

 

(1,297

)

 

 

(1,124

)

 

 

-

 

 

 

(3,868

)

Other income (expense)

 

 

(1,836

)

 

 

-

 

 

 

-

 

 

 

2,578

 

 

 

-

 

 

 

742

 

Total other income (expense), net

 

 

(3,232

)

 

 

(51

)

 

 

(1,297

)

 

 

1,454

 

 

 

-

 

 

 

(3,126

)

Total pre-tax income (loss)

 

$

(3,336

)

 

$

(415

)

 

$

138

 

 

$

(1,147

)

 

$

-

 

 

$

(4,760

)

3727


 

 

For the six months ended December 31, 2019

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Intercompany Eliminations(1)

 

 

Consolidated Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

27,622

 

 

$

1,756

 

 

$

2,544

 

 

$

80

 

 

$

(80

)

 

$

31,922

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of durable medical equipment sold and services

 

 

(7,152

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,152

)

Cost of durable medical equipment rentals

 

 

(4,450

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,450

)

Depreciation and amortization

 

 

(977

)

 

 

(358

)

 

 

(861

)

 

 

(1

)

 

 

-

 

 

 

(2,197

)

Stock-based compensation(2)

 

 

-

 

 

 

(273

)

 

 

-

 

 

 

(228

)

 

 

-

 

 

 

(501

)

Transaction costs(3)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(577

)

 

 

-

 

 

 

(577

)

Other selling, general and administrative

 

 

(14,608

)

 

 

(1,082

)

 

 

(250

)

 

 

(2,329

)

 

 

80

 

 

 

(18,189

)

Total operating expenses

 

 

(27,187

)

 

 

(1,713

)

 

 

(1,111

)

 

 

(3,135

)

 

 

80

 

 

 

(33,066

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,933

)

 

 

(83

)

 

 

(1,313

)

 

 

-

 

 

 

-

 

 

 

(3,329

)

Other income (expense)

 

 

3

 

 

 

-

 

 

 

-

 

 

 

(692

)

 

 

-

 

 

 

(689

)

Total other income (expense), net

 

 

(1,930

)

 

 

(83

)

 

 

(1,313

)

 

 

(692

)

 

 

-

 

 

 

(4,018

)

Total pre-tax income (loss)

 

$

(1,495

)

 

$

(40

)

 

$

120

 

 

$

(3,747

)

 

$

-

 

 

$

(5,162

)

(1)

The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC (DME Manager), provides advisory services to DME Inc. and receives consulting fee from DME Inc. for those services.  DME Manager is part of general corporate operations while DME Inc. is part of the durable medical equipment segment.  The corresponding expense to DME Inc. and revenue to DME Manager are eliminated in consolidation.  Additionally, the Company’s majority-owned subsidiary, Forest, owns Series A-1 Preferred Stock and Series A-2 Preferred Stock of HC LLC.  Forest is part of general corporate operations while HC LLC is part of the durable medical equipment segment.  The corresponding interest expense to HC LLC and interest income to Forest are eliminated in consolidation.

(2)

Stock-based compensation attributable to the investment management segment is included in investment management expenses in the condensed consolidated statements of operations.  Stock-based compensation attributable to the general corporate segment is included in selling, general and administrative expense in the condensed consolidated statements of operations.

(3)

Transaction costs, which consist of legal and other professional services incurred in connection with consummated and unconsummated transactions, are included in selling, general and administrative expense in the condensed consolidated statements of operations.

38


The following tables illustrate assets by segment:

 

 

As of December 31, 2020

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Total

 

Fixed assets, net

 

$

8,121

 

 

$

27

 

 

$

52,576

 

 

$

4

 

 

$

60,728

 

Identifiable intangible assets, net

 

 

7,374

 

 

 

2,035

 

 

 

4,622

 

 

 

-

 

 

 

14,031

 

Goodwill

 

 

50,010

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50,010

 

Other assets

 

 

19,310

 

 

 

2,978

 

 

 

2,782

 

 

 

49,540

 

 

 

74,610

 

Total

 

$

84,815

 

 

$

5,040

 

 

$

59,980

 

 

$

49,544

 

 

$

199,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2020

 

(in thousands)

 

Durable Medical Equipment

 

 

Investment Management

 

 

Real Estate

 

 

General Corporate

 

 

Total

 

Fixed assets, net

 

$

8,854

 

 

$

35

 

 

$

53,188

 

 

$

4

 

 

$

62,081

 

Identifiable intangible assets, net

 

 

7,974

 

 

 

2,284

 

 

 

4,871

 

 

 

-

 

 

 

15,129

 

Goodwill

 

 

50,010

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50,010

 

Other assets

 

 

19,055

 

 

 

2,654

 

 

 

2,171

 

 

 

44,345

 

 

 

68,225

 

Total

 

$

85,893

 

 

$

4,973

 

 

$

60,230

 

 

$

44,349

 

 

$

195,445

 

39


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We areGEG is a holdingpublicly-traded alternative asset management company seeking to acquire assetsfocused on growing a scalable and businesses, where our peoplediversified portfolio of long-duration, permanent capital vehicles across corporate credit, specialty finance, real estate and other assets provide a competitive advantage.  Weasset classes. GEG and its subsidiaries currently have three business operating segments: durable medical equipment, investment management and real estate, with general corporate representing unallocated costs and activity to arrive at consolidated operations.

In September 2018, we launched our durable medical equipment segment by acquiring two durable medical equipment businesses that specialize in the distribution of respiratory care equipment, including positive air pressure equipment and supplies, ventilators and oxygen equipment, and also provide sleep study services.

Our investment management business manages a business development company,manage Great Elm Capital Corp. (GECC), a credit-focused private fund, Great Elm Opportunities Fund I, LP,publicly-traded business development company, and separate accounts forMonomoy Properties UpREIT, LLC (Monomoy UpREIT), an institutional investor.industrial-focused real estate investment trust, in addition to other investments. The combined assets under management of these entities at DecemberMarch 31, 20202023 was approximately $228.1$630.7 million.

Our real estate business, which we launched in March 2018, has a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property). The Property is fully-leased, on a triple-net basis, to a single tenant through March 31, 2030.

The operationstotal level of our general corporate segment encompass our corporate headquarters operations, in addition toassets under management consulting services provided to certaincould be adversely affected by conditions outside of our subsidiaries.control, including a decline in the market value of our assets under management, due to declines or heightened volatility in the capital markets, fluctuations in interest rates, the current inflationary environment, and other market factors, as well as financial crises, political or diplomatic developments in the U.S. or globally, including rising trade tensions between the U.S. and China, pandemics or other public health crises, such as a potential resurgence of COVID-19 or another similar highly infectious or contagious disease, trade wars, social or civil unrest, insurrection, war, including the ongoing conflict between Russia and Ukraine which has significantly impacted the global economy and financial markets, terrorism, natural disasters, or risks associated with global climate change.

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

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

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

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

28


In January 2023, Monomoy BTS Corporation (MBTS) completed purchases of certain land parcels located in Canton, Mississippi, and Midway, Florida. Contemporaneously with the land purchases, MBTS entered into commercial lease agreements, as a lessor, in respect to the land parcels and build-to-suit improvements to be constructed thereon. The leases will commence upon substantial completion of the build-to-suit development, which is expected not later than the first calendar quarter of 2024. We intend to sell the land and improvements with the attached leases at or close to the respective lease commencement date. During the three and nine months ended March 31, 2023, the Company capitalized costs of $1.7 million within real estate under development (current) on its balance sheet, representing the cost of land and development and construction costs directly identifiable with the two real estate projects.

As of June 30, 2020,2022, we had $1.5 billion$821 million of net operating loss (NOL) and capital loss carryforwards for federal income tax purposes.

Holding Company Reorganization

On December 29, 2020, the Company completed a reorganization of the Company’s corporate structure (the Holding Company Reorganization), where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc. (the Company).  Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG.”  Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Exchange Act. The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.

Following the consummationSale of the Holding Company Reorganization, J.P. Morgan Broker-Dealer Holdings Inc. (JPM), a Delaware corporation and affiliateControlling Interest in Forest, GEG retained approximately $154 million of JPMorgan Chase & Co., Forest, the Company and JPM agreed to effect certain transactions pursuant tothese carryforwards, $131 million of which JPM provided financing in an aggregate amount of $37.7 million.

In connection with such financing, among other things:

Forest issued to JPM 35,010 newly issued shares of 9.0% preferred stock (the Forest Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share;

40


HC LLC issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to the owners of DME Inc. in the form of a distribution.  Ultimately, 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel Capital Partners SBIC, L.P. (Corbel), and 9.95% is held by Valley Healthcare Group, LLC (VHG).  Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;

HC LLC, a wholly-owned subsidiary of DME Inc., and sole owner of the durable medical equipment operating subsidiaries, issued to Forest 34,010 newly issued shares of 9.0% Series A-2 preferred stock (the Series A-2 Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share.  Upon a sale of the durable medical equipment business, such holders of Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale;

HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;

Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and

JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million.

(each collectively noted above, the JPM Transactions).

Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility).

COVID-19

During the three and six months ended December 31, 2020, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic.  In particular, the investment management business continues to experience reduced assets under management in our managed portfolios as compared to pre-pandemic levels.  COVID-19 may continue to impact such managed portfolios as well as the value of the shares of GECC held by the Company in the future.  In addition, the durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups.  The impact of COVID-19 continues to evolve and its duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time. However, the Company expects to experience decreased durable medical equipment rental revenues in the near future due to the reduction in new patient set-ups during the pandemic. Should the disruption continue for an extended period of time, the impact could have a more severe adverse effectexpire on our business and operations.

In addition, COVID-19 may impact our ability to act on new acquisitions or other business opportunities.

The Company prioritizes the health and safety of employees and customers.  Beginning in early March 2020, all employees at our corporate headquarters as well as certain employees of DME Inc. moved to a remote-working model.  In addition, the officers of the Company have maintained regular communications with key service providers, including legal and accounting professionals, other consultants and vendors, noting that those firms have similarly moved to remote-working models to the extent possible.  Such employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary.June 30, 2023.

At DME Inc. we invested in virtual patient set-ups which allow our respiratory therapists to interact with patients by video to maintain social distance.  Certain other employees whose responsibilities have been impacted by social distancing have been temporarily redeployed within the organization. DME Inc. has experienced increased operating expenses related to paid employee absences due to COVID-19 illnesses and exposures, costs related to cleaning and disinfecting workspaces, and additional shipping costs for remote set-ups.

41


We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, particularly with respect to the travel restrictions, business closures and other quarantine measures imposed on our employees, suppliers and service providers by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities.  As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our operating companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S.accounting principles generally accepted accounting principles (GAAP).in the United States of America. The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future. During the sixthree and nine months ended DecemberMarch 31, 2020,2023 we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 20202022 as it relates to recurring transactions.

Previously reported assets and liabilities related to our Durable Medical Equipment (DME) Business, primarily consisting of HC LLC and its subsidiaries, have been reclassified as assets and liabilities held for sale on the Company's consolidated balance sheet as of June 30, 2022. In addition, the historical results of the DME Business and related activity have been presented in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2023 and 2022 as discontinued operations. See Note 4 – Assets and Liabilities Held for Sale and Discontinued Operations to the accompanying unaudited condensed consolidated financial statements. Following presentation of our DME Business as discontinued operations, the Company views its operations and manages its business as one operating segment focused on growing a scalable and diversified portfolio of long-duration, permanent capital vehicles across corporate credit, specialty finance, real estate and other asset classes.

Results of Operations

The following discussion reflects the historical performance of our three business operating segments and general corporate.  We expect that our results of operations in future periods will be adversely impacted by the COVID-19 outbreak and its negative effects on the global economic conditions.

The following table provides the results of our consolidated operations:

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

2020

 

 

Percent Change

 

 

2019

 

 

2020

 

 

Percent Change

 

 

2019

 

 

For the three months ended March 31,

 

 

For the nine months ended March 31,

 

(in thousands)

 

2023

 

 

Percent Change

 

2022

 

 

2023

 

 

Percent Change

 

2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,898

 

 

92%

 

$

988

 

 

$

5,637

 

 

88%

 

$

2,992

 

Total revenue

 

$

16,579

 

 

 

0

%

 

$

16,551

 

 

$

33,234

 

 

 

4

%

 

$

31,922

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

(4,703

)

 

 

27

%

 

 

(3,689

)

 

 

(8,910

)

 

 

25

%

 

 

(7,152

)

Cost of rentals

 

 

(1,621

)

 

 

(26

)%

 

 

(2,185

)

 

 

(3,536

)

 

 

(21

)%

 

 

(4,450

)

Non-cash compensation

 

 

(660

)

 

14%

 

 

(578

)

 

 

(2,246

)

 

(13)%

 

 

(2,572

)

Transaction costs

 

 

-

 

 

(100)%

 

 

(92

)

 

 

(425

)

 

(21)%

 

 

(535

)

Other selling, general and administrative

 

 

(10,436

)

 

 

6

%

 

 

(9,817

)

 

 

(20,380

)

 

 

6

%

 

 

(19,267

)

 

 

(3,826

)

 

50%

 

 

(2,546

)

 

 

(9,709

)

 

52%

 

 

(6,400

)

Depreciation and amortization

 

 

(1,021

)

 

 

(10

)%

 

 

(1,130

)

 

 

(2,042

)

 

 

(7

)%

 

 

(2,197

)

 

 

(281

)

 

NM

 

 

(89

)

 

 

(870

)

 

183%

 

 

(307

)

Total operating expenses

 

 

(17,781

)

 

 

 

 

 

 

(16,821

)

 

 

(34,868

)

 

 

 

 

 

 

(33,066

)

Operating income (loss)

 

 

(1,202

)

 

 

 

 

 

 

(270

)

 

 

(1,634

)

 

 

 

 

 

 

(1,144

)

Total operating costs and expenses

 

 

(4,767

)

 

 

 

(3,305

)

 

 

(13,250

)

 

 

 

(9,814

)

Operating loss

 

 

(2,869

)

 

 

 

 

(2,317

)

 

 

(7,613

)

 

 

 

 

(6,822

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,911

)

 

 

17

%

 

 

(1,633

)

 

 

(3,868

)

 

 

16

%

 

 

(3,329

)

 

 

(1,095

)

 

(15)%

 

 

(1,286

)

 

 

(5,024

)

 

30%

 

 

(3,872

)

Other income (expense)

 

 

2,117

 

 

 

(1049

)%

 

 

(223

)

 

 

742

 

 

 

(208

)%

 

 

(689

)

 

 

3,509

 

 

NM

 

 

(2,862

)

 

 

32,374

 

 

NM

 

 

(3,395

)

Total other expense, net

 

 

206

 

 

 

 

 

 

 

(1,856

)

 

 

(3,126

)

 

 

 

 

 

 

(4,018

)

Total pre-tax income (loss)

 

$

(996

)

 

 

 

 

 

$

(2,126

)

 

$

(4,760

)

 

 

 

 

 

$

(5,162

)

Total other income (expense), net

 

 

2,414

 

 

 

 

(4,148

)

 

 

27,350

 

 

 

 

(7,267

)

(Loss) income before income taxes from continuing operations

 

$

(455

)

 

 

$

(6,465

)

 

$

19,737

 

 

 

$

(14,089

)

Revenue

The increases in revenues29


Revenue

Revenues for the three and sixnine months ended DecemberMarch 31, 20202023 increased $0.9 million and $2.6 million, respectively, as compared to the corresponding periods in the prior year areyear. The increase is primarily attributable to organic growththe Monomoy UpREIT management agreement acquired in the durable medical equipment businesses resupply sales.  This increase was partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-upsMay 2022.

Operating Costs and increased revenue reserve constraints, as well as decrease in management fees earned from our investment management business.Expenses

42


Operating costs and expenses

The increase in operating costs for the three and sixnine months ended DecemberMarch 31, 2020, as compared to the corresponding periods in the prior year, is primarily attributable to additional costs associated with the durable medical equipment business partially due to the impact of COVID-19, including cost of goods sold and cost of rentals, which is discussed in more detail under “—Durable Medical Equipment” below.

Other income (expense)

Interest expense2023 increased for the three and six months ended December 31, 2020, as compared to the three and six months ended December 31, 2019, primarily due to interest expense associated with the Convertible Notes issued in February 2020.

Other income and expense for the three and six months ended December 31, 2020 and 2019 primarily consisted of dividend income and net unrealized gains and losses on the Company’s investment in GECC which is discussed in more detail under “—General Corporate” below.

In addition, the Company recognized approximately $1.9 million in losses on extinguishment of debt during the three months ended December 31, 2020.  There was no corresponding activity in the prior periods presented in the table above.

Durable Medical Equipment Business

The key metrics of our durable medical equipment business include:

Patients and setup growth – which drives revenue growth and takes advantage of scalable operations

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The following table provides the results of our durable medical equipment business:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

Percent Change

 

 

2019

 

 

2020

 

 

Percent Change

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

14,543

 

 

 

1

%

 

$

14,391

 

 

$

29,153

 

 

 

6

%

 

$

27,622

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

(4,703

)

 

 

27

%

 

 

(3,689

)

 

 

(8,910

)

 

 

25

%

 

 

(7,152

)

Cost of rentals

 

 

(1,621

)

 

 

(26

)%

 

 

(2,185

)

 

 

(3,536

)

 

 

(21

)%

 

 

(4,450

)

Transaction costs

 

 

(87

)

 

-%

 

 

 

-

 

 

 

(87

)

 

-%

 

 

 

-

 

Other selling, general and administrative

 

 

(8,028

)

 

 

4

%

 

 

(7,736

)

 

 

(15,799

)

 

 

8

%

 

 

(14,608

)

Depreciation and amortization

 

 

(462

)

 

 

(11

)%

 

 

(520

)

 

 

(925

)

 

 

(5

)%

 

 

(977

)

Total operating expenses

 

 

(14,901

)

 

 

 

 

 

 

(14,130

)

 

 

(29,257

)

 

 

 

 

 

 

(27,187

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(687

)

 

 

(27

)%

 

 

(937

)

 

 

(1,396

)

 

 

(28

)%

 

 

(1,933

)

Other income (expense)

 

 

(1,833

)

 

-%

 

 

 

-

 

 

 

(1,836

)

 

 

(61300

)%

 

 

3

 

Total other expense, net

 

 

(2,520

)

 

 

 

 

 

 

(937

)

 

 

(3,232

)

 

 

 

 

 

 

(1,930

)

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total pre-tax income (loss)

 

$

(2,878

)

 

 

 

 

 

$

(676

)

 

$

(3,336

)

 

 

 

 

 

$

(1,495

)

43


Durable Medical Equipment Revenue

For the three months ended December 31, 2020, revenues from the sale of medical equipment and sleep study services were $8.4$1.5 million and $1.1$3.4 million, respectively, while for the three months ended December 31, 2019, such revenues were $7.6 million and $1.5 million, respectively.

For the six months ended December 31, 2020, revenues from the sale of medical equipment and sleep study services were $16.4 million and $2.3 million respectively, while for the six months ended December 31, 2019 such revenues were $13.9 million and $2.8 million, respectively.

The increases in medical equipment sales versus the corresponding period in the prior year are primarily attributable to organic growth of CPAP resupply sales, while the decrease in sleep study services is primarily attributable to softened demand for sleep studies during the ongoing COVID-19 pandemic.

For the three and six months ended December 31, 2020, rental revenue was $5.0 million and $10.4 million, respectively, as compared to $5.3 million and $10.8 million, respectively, for the three and six months ended December 31, 2019.  This decrease is due primarily to reduced referral pipelines for new equipment set-ups during the ongoing COVID-19 pandemic, which are customarily driven by in-house or external sleep studies.

Revenue reserve constraints increased $1.0 million and $1.2 million, respectively during the three and six months ended December 31, 2020 as compared to the corresponding periods in the prior year. This decrease in revenues isincrease was mainly attributable to several factors, including collections experience during the pandemic and the resulting composition of receivables at period end, as well as a favorable change in estimate recorded in the three months ended December 31, 2019 related to the integration of acquired receivables.

Durable Medical Equipment Operating Costs and Expenses

Cost of goods sold includes inventory costs for medical equipment sold and direct costs associated with running sleep study services, including staff compensation to performservicing the studiesrecently acquired Monomoy UpREIT management agreement.

Other Expenses and the purchase of supplies used in the studies.  Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses.Income

The increase in operating costsInterest expense for the three months ended DecemberMarch 31, 2020 as2023 decreased by $0.2 million, compared to the corresponding periods in the prior year is primarily attributable to costs of goods sold and cost of rentals. Such increases in costs corresponded to increases in revenues but were also impacted by the revenue mix within the durable medical equipment business.  We incurred lower margins on sales and services as high margin sleep lab testing decreased as a percentage of revenue and was replaced with lower margin equipment and supplies sales.  The Company realized higher margins on rentals due to lower capital expenditures for new set-ups.  

In addition to these factors, the increase in operating costs for the six months ended December 31, 2020 as compared to the corresponding periods in the prior year are also impacted by increases in other operating expenses of the durable medical equipment business to enhance scalability of the durable medical equipment business.

For the three months ended December 31, 2020 and 2019, payroll related costs were $5.8 million and $5.2 million, respectively, and for the six months ended December 31, 2020 and 2019, payroll related costs were $11.0 million and $9.9 million, respectively.  The increases in payroll related costs were primarily related to accrued management bonus plan in the current year that was not present in the prior comparable period along with a shared services agreement between GEG and DME Inc.

The durable medical equipment business has also experienced increased operating expenses related to paid employee absences due to COVID-19 illnesses and exposures, costs related to cleaning and disinfecting workspaces, and additional shipping costs for remote set-ups.  For the three and six months ended December 31, 2020, freight and postage expenses were $0.4 million and $0.8 million, respectively, as compared to $0.3 million and $0.6 million, respectively, for the three and six months ended December 31, 2019.  The increase in freight and postage costs was primarily attributable to the additional costs of remote patient set-ups which were performed in person prior to the COVID-19 pandemic.

44


Depreciation and amortization includes the depreciation of fixed assets, excluding depreciation on the equipment held for rental, which is included in the cost of rentals, and amortization of the intangible assets resulting from the acquisition of the durable medical equipment businesses.  Depreciation and amortization for the three and six months ended December 2020 decreased as compared to the three and six months ended December 31, 2019 due to decreased capital expenditures during the COVID-19 pandemic.

Durable Medical Equipment Other Expenses

The decrease in interest expense for the three and six months ended December 31, 2020 as compared to the corresponding periods in the prior year is attributable primarily to lower outstanding principal balances on the Corbel Facility and DME Revolver, decreasing to $25.3 million before being paid down in full on December 29, 2020 in conjunction with the JPM Transactions.  This is compared to $32.4 million at September 30, 2019.

During the three and six months ended December 31, 2020, the Company recognized a $1.9 million loss on the extinguishment of the Corbel Term Loan, which was paid down in conjunction with the JPM Transactions.

Investment Management Business

The key metrics of our investment management business are:

Assets under management ― which provides the basis on which our management fees and performance milestones for vesting of certain equity awards are based; and

Investment performance ― on which our incentive fees (if any) are based and on which we are measured against our competition.

The following table provides the results of our investment management business:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

Percent Change

 

 

2019

 

 

2020

 

 

Percent Change

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

760

 

 

 

(15

)%

 

$

889

 

 

$

1,533

 

 

 

(13

)%

 

$

1,756

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

(197

)

 

 

101

%

 

 

(98

)

 

 

(391

)

 

 

43

%

 

 

(273

)

Consulting agreement

 

 

-

 

 

-%

 

 

 

-

 

 

 

-

 

 

 

(100

)%

 

 

(211

)

Other general and administrative

 

 

(719

)

 

 

27

%

 

 

(566

)

 

 

(1,251

)

 

 

44

%

 

 

(871

)

Depreciation and amortization

 

 

(127

)

 

 

(29

)%

 

 

(179

)

 

 

(255

)

 

 

(29

)%

 

 

(358

)

Total operating expenses

 

 

(1,043

)

 

 

 

 

 

 

(843

)

 

 

(1,897

)

 

 

 

 

 

 

(1,713

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(25

)

 

 

(39

)%

 

 

(41

)

 

 

(51

)

 

 

(39

)%

 

 

(83

)

Other income (expense)

 

 

-

 

 

-%

 

 

 

-

 

 

 

-

 

 

-%

 

 

 

-

 

Total other expense, net

 

 

(25

)

 

 

 

 

 

 

(41

)

 

 

(51

)

 

 

 

 

 

 

(83

)

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total pre-tax income (loss)

 

$

(308

)

 

 

 

 

 

$

5

 

 

$

(415

)

 

 

 

 

 

$

(40

)

Investment Management Revenue

Investment management revenues include management fees and administrative fees.  For three and six months ended December 31, 2020, management fees were $0.6 million and $1.2 million, respectively, and administrative fees were $0.2 million and $0.3 million, respectively.  For the three and six months ended December 31, 2019, management fees were $0.8 million and $1.5 million, respectively, and administrative fees were $0.1 million and $0.2 million, respectively.

45


The decrease in management fees for the three and six months ended December 31, 2020 as compared to the three and six months ended December 31, 2019 is primarily attributable to decreases in the average assets on which such fees are calculated as a result of the impact of COVID-19 on the portfolio managed.

Investment Management Costs and Expenses

GECM had a consulting agreement with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees.  The consulting agreement expired in November 2019 and as such, there were no corresponding fees incurred for the three and six months ended December 31, 2020.

Other general and administrative costs consist primarily of professional fees, facilities and other overhead costs, and payroll and related costs, excluding stock-based compensation.  The increase in general and administrative costs for the three and six months ended December 31, 2020 as compared to the three and six months ended December 31, 2019, is primarily attributable to an increase in allocated payroll costs due to additional staffing in the investment management business.

Interest expense for the three and six months ended December 31, 2020 decreased as compared to the three and six months ended December 31, 2019 due to the decrease in LIBOR, on which the interest rate is based.

Real Estate Business

The key metrics of our real estate business include rental revenues, depreciation on rental properties and interest expense on the related debt.

The following table provides the results of our real estate business:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

Percent Change

 

 

2019

 

 

2020

 

 

Percent Change

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

1,276

 

 

 

0

%

 

$

1,271

 

 

$

2,548

 

 

 

0

%

 

$

2,544

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

(127

)

 

 

1

%

 

 

(126

)

 

 

(252

)

 

 

1

%

 

 

(250

)

Depreciation and amortization

 

 

(431

)

 

 

0

%

 

 

(430

)

 

 

(861

)

 

-%

 

 

 

(861

)

Total operating expenses

 

 

(558

)

 

 

 

 

 

 

(556

)

 

 

(1,113

)

 

 

 

 

 

 

(1,111

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(647

)

 

 

(1

)%

 

 

(655

)

 

 

(1,297

)

 

 

(1

)%

 

 

(1,313

)

Other income (expense)

 

 

-

 

 

-%

 

 

 

-

 

 

 

-

 

 

-%

 

 

 

-

 

Total other expense, net

 

 

(647

)

 

 

 

 

 

 

(655

)

 

 

(1,297

)

 

 

 

 

 

 

(1,313

)

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total pre-tax income (loss)

 

$

71

 

 

 

 

 

 

$

60

 

 

$

138

 

 

 

 

 

 

$

120

 

Real Estate Revenue

Real estate rental revenue for the three and six months ended December 31, 2020 was consistent with the three and six months ended December 31, 2019.  Real estate rental revenue consists of rents received from the Class A office buildings in Fort Meyers, Florida.

Real Estate Costs and Expenses

The real estate business’ costs primarily consist of management fees, insurance and state sales tax, depreciation of real estate assets and the amortization of the in-place lease intangible assets.  Our costs and expenses have generally remained consistent year over year.

46


General Corporate

The following table provides the results of our general corporate activities:

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

Percent Change

 

 

2019

 

 

2020

 

 

Percent Change

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

45

 

 

 

(21

)%

 

$

57

 

 

$

136

 

 

 

70

%

 

$

80

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

(88

)

 

 

(20

)%

 

 

(110

)

 

 

(323

)

 

 

42

%

 

 

(228

)

Transaction costs

 

 

(229

)

 

 

(53

)%

 

 

(486

)

 

 

(261

)

 

 

(55

)%

 

 

(577

)

Other general and administrative

 

 

(1,006

)

 

 

34

%

 

 

(752

)

 

 

(2,152

)

 

 

(8

)%

 

 

(2,329

)

Depreciation and amortization

 

 

(1

)

 

-%

 

 

 

(1

)

 

 

(1

)

 

-%

 

 

 

(1

)

Total operating expenses

 

 

(1,324

)

 

 

 

 

 

 

(1,349

)

 

 

(2,737

)

 

 

 

 

 

 

(3,135

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(552

)

 

-%

 

 

 

-

 

 

 

(1,124

)

 

-%

 

 

 

-

 

Other income (expense)

 

 

3,950

 

 

 

(1871

)%

 

 

(223

)

 

 

2,578

 

 

 

(473

)%

 

 

(692

)

Total other income (expense), net

 

 

3,398

 

 

 

 

 

 

 

(223

)

 

 

1,454

 

 

 

 

 

 

 

(692

)

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total pre-tax income (loss)

 

$

2,119

 

 

 

 

 

 

$

(1,515

)

 

$

(1,147

)

 

 

 

 

 

$

(3,747

)

General Corporate Revenue

For the three and six months ended December 31, 2020 and 2019, all revenue was derived from fees earned by Great Elm DME Manager, LLC (DME Manager), which provides consulting services to Great Elm DME, Inc. (DME Inc.).

General Corporate Costs and Expenses

Our general and administrative costs primarily consisted of professional fees and payroll costs in connection with our general corporate oversight of our subsidiaries and diligence efforts towards identifying asset and business acquisition opportunities.  Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities.

The decrease in other general and administrative costs for the six months ended December 31, 2020 as compared to the six months ended December 31, 2019 is primarily attributable to lower audit-related professional fees due to the change in auditors in the prior fiscal year, as well as the Company becoming a non-accelerated filer with reduced reporting requirements under the updated rules of the SEC.

Other Income (Expense)

Interest expense for the three and six months ended December 31, 2020 consists of interest on the Convertible Notes which were issued in February 2020.  There is no corresponding debt or related interest expense for the three and six months ended December 31, 2019.

Other income (expense) primarily consists of dividends and unrealized losses on the Company’s investment in GECC.  Dividend income increased for the three and six months ended December 31, 2020 as compared to the corresponding periods in the prior year, as there was no interest expense related to the Company’s investment35,010 shares of preferred stock issued by Forest to JPM on December 29, 2020 (the Forest Preferred Stock) after the Sale of Controlling Interest in GECCForest on December 30, 2022, which was partially offset by interest expense on the 7.25% notes due in 2027 issued in June 2022 (the GEGGL Notes) and on the $6.3 million promissory note issued to Imperial Capital Asset Management, LLC in May 2022 (the Seller Note) (fully repaid in February 2023). Interest expense for the nine months ended March 31, 2023 increased through stock distributions receivedby $1.2 million, primarily due to interest on the GEGGL Notes and participationSeller Note, which was partially offset by decrease in interest expense on the GECC rights offeringForest Preferred Stock following the Sale of Controlling Interest in October 2020.  In addition,Forest on December 30, 2022.

During the three months ended March 31, 2023, the Company recognized $3.5 million of other income (net), comprised of net realized and unrealized gainsgain on investments of $2.6$2.0 million and $0.7dividends and interest income of $1.5 million. During the nine months ended March 31, 2023, the Company recognized $32.4 million forof other income (net), comprised of gain on Sale of Controlling Interest in Forest of $10.5 million, unrealized gain on the Investment in Forest of $24.4 million recognized in December 2022, and dividends and interest income of $4.4 million, partially offset by net realized and unrealized loss on investments (excluding the Investment in Forest) of $6.9 million. During the three and sixnine months ended DecemberMarch 31, 2020,2022, the Company recognized $2.9 million and $3.4 million of other expense (net), respectively, mainly attributed to net realized and unrealized loss on investments of $3.2 million and $5.1 million, respectively, and net realized and unrealized lossesloss on investments of $0.8our consolidated fund, Great Elm SPAC Opportunity Fund, LLC (GESOF), of $0.3 million in both periods, partially offset by dividends and interest income of $0.6 million and $1.8$1.9 million, for the three and six months ended December 31, 2019, respectively.  Our investment in GECC is marked-to-market by reference to the closing price on Nasdaq as of each period end.

47


Income Taxes

We do not expect that we will owe any federal taxes for the nine months ended March 31, 2023. As of June 30, 2020,2022, the Company had net operating loss (NOL) and capital loss carryforwards for federal and state income tax purposes of approximately $1.5 billion$821 million. Following the Sale of Controlling Interest in Forest, the Forest entity ceased being part of our consolidated tax group and $203NOL carryforwards attributed to Forest generally became unavailable for the Company's use going forward. The Company retained approximately $154 million respectively.  Theof the federal carryforwards available to the Company as of June 30, 2022. Of these, approximately $139 million of federal NOL carryforwards generated prior to fiscal year 2018 will expire from 20212023 through 2037.  The federal2025 (including approximately $131 million that will expire on June 30, 2023). Federal NOL carryforwards generated in fiscal year 2018 or later of approximately $7 million can be carried forward indefinitely. The state NOLCapital loss carryforwards will expire from 2029of approximately $8 million can be carried forward through 2038.2027. The Company assesses NOL and capital loss carryforwards based on taxable income on an annual basis.

30


Liquidity and Capital Resources

Cash Flows

Cash flows used in operating activities of our continuing operations for the sixnine months ended DecemberMarch 31, 20202023 were $1.7$3.6 million. The adjustments to reconcile our net income from continuing operations of $19.7 million to net cash outflow was primarily the result of our net loss of $4.8 million, $3.3 millionused in purchases of investments made by the consolidated fund and $1.4operating activities included add-backs for various non-cash charges, such as $2.0 million of distributions received in stock from the Company’s investment in GECC.  These outflows were partially offset bystock-based compensation expense, $1.7 million of non-cash inflowsinterest and amortization of $5.2capitalized issuance costs, and $0.9 million related toof depreciation and amortization, which was offset by deduction of $12.8 million of unrealized gain on our investments, $4.7 million of realized gain on our investments, $10.5 million of gain on Sale of Controlling Interest in Forest in December 2022, and $1.9the net negative change in our operating assets and liabilities of $2.0 million. During the nine months ended March 31, 2023 we also received $1.6 million relatedattributed to amortizationsales of debt issuance costs.

investments by GESOF. Cash flows provided by operating activities of our discontinued operations for the sixnine months ended DecemberMarch 31, 20192023 were $3.1$0.8 million.

Cash flows provided by operating activities of our continuing operations for the nine months ended March 31, 2022 were $6.8 million. The net cash inflow was primarily the result of sales of investments by GESOF of $24.5 million, and non-cash adjustments of $2.2 million in stock-based compensation, $4.4 million in unrealized loss on investments, $0.7 million in realized loss on investments, $1.1 million of non-cash interest and amortization of capitalized issuance costs, $0.3 million related to depreciation and amortization, and $0.3 million of net realized and unrealized loss on investments of GESOF, partially offset by our net loss from continuing operations of $5.3$14.0 million, offset by non-cash charges of $8.2 million.  Additional net cash inflows from operations are attributable to an increase of $1.9 millionnegative change in accounts payable, accruedour operating assets and liabilities and other liabilities partially offset by outflows due to decreases of $0.7 million, and $0.8$11.7 million related toin purchases of investments by GESOF. The cash flows provided by operating leases and related party payables, respectively.  The fluctuations in these accounts are dueactivities of our discontinued operations for the nine months ended March 31, 2022 were $8.6 million.

Cash flows provided by investing activities of our continuing operations for the nine months ended March 31, 2023 were $41.1 million which is attributed to the timingcombined proceeds from sale of Forest, net of cash paymentssold, of $44.3 million, partially offset by purchases of investments of $3.1 million. Cash flows provided by investing activities of our discontinued operations for the nine months ended March 31, 2023 of $67.2 million were primarily attributed to the cash proceeds from the Sale of HC LLC, net of cash sold and cash receipts inbefore transaction costs and distributions to non-controlling interests, of $71.3 million, partially offset by other investing activities of our DME Business.

Cash flows provided by investing activities of our continuing operations for the normal course of business.

Cashnine months ended March 31, 2022 were $19 thousand and cash flows used in investing activities of our discontinued operations for the sixnine months ended DecemberMarch 31, 20202022 were $11.4$4.5 million.  The net cash outflow primarily consisted of $8.8 million in purchases of investments related to participation in the GECC non-transferable rights offering in October 2020 and $3.1 million in purchases of equipment to be held for rental.

Cash flows used in investing activities for the six months ended December 31, 2019 were $3.0 million.  The net cash outflow primarily consisted of $3.5 million in purchases of equipment for rental partially offset by proceeds from sale of equipment held for rental and disposal of property and equipment.

Cash flows provided by financing activities for the six months ended December 31, 2020 were $5.6 million which primarily consisted of $37.7 million in gross proceeds from the JPM Transactions and $1.6 million in proceeds from new equipment financing debt.  Such inflows were partially offset by principal payments of $32.1 million on our debt, including $31.0 million used to pay off the Corbel Facility, and debt issuance costs of $1.3 million in connection with the JPM Transactions.

Cash flows used in financing activities of our continuing operations for the sixnine months ended DecemberMarch 31, 20192023 were $3.6$42.4 million, which primarily consisted of principal payments of $38.1 million on long term debt, related party notes payablethe promissory note issued to Forest on December 29, 2022 and fully repaid by January 3, 2023, and principal payments of $3.7 million on the Seller Note, as well as distributions to non-controlling interests in GESOF of $0.6 million. Cash flows used in financing activities of our revolving linediscontinued operations for the nine months ended March 31, 2023 of credit.$5.2 million were primarily attributed to distributions to non-controlling interests upon Sale of HC LLC of $5.9 million.

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

Financial Condition

As of DecemberMarch 31, 2020,2023, we had an unrestricted cash balance of $32.9$84.1 million. We also hold 5,425,644held 1,569,787 shares of GECC common stock with an estimated fair value of $19.5$14.1 million as of DecemberMarch 31, 2020.2023.

We intendbelieve we have sufficient liquidity available to make acquisitions or investments that we believe will result inmeet our short-term and long-term obligations for at least the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness.  If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.next 12 months.

4831


Borrowings

As of DecemberMarch 31, 2020,2023, the Company had $31.3$26.9 million face value in Convertibleoutstanding aggregate principal of the GEGGL Notes. The GEGGL Notes outstanding.are due on June 30, 2027, and interest is paid quarterly. The ConvertibleGEGGL Notes include covenants that limit additional indebtedness or the payment of dividends in the event that our net consolidated debt to equity ratio is, or would be on a pro forma basis, greater than 2 to 1. In addition, if our net consolidated debt to equity ratio is greater than 2 to 1 at the end of any calendar quarter, we must retain no less than 10% of our excess cash flow as cash and cash equivalents until such time as our net consolidated debt to equity ratio is less than 2 to 1 at the end of a calendar quarter.

As of March 31, 2023, the Company had $37.0 million principal balance in convertible notes outstanding (including cumulative interest paid in-kind). The convertible notes are held by a consortium of investors, including related parties. The Convertible Notesconvertible notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and December 31, in cash or in kind at the option of the Company.

The Convertible Notesconvertible notes are due on February 26, 2030, but are convertible at the option of the holders, subject to the terms therein, prior to maturity into shares of our common stock. Upon conversion of any note, the Company will pay or deliver, as the case may be, to the noteholder, in respect of each $1,000 principal amount of notes being converted, shares of common stock equal to the conversion rate in effect on the conversion date, together with cash, if applicable, in lieu of delivering any fractional share of common stock.

As of December 31, 2020, JPM held $35.0 million face value in shares of Forest Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly.  The shares are mandatorily redeemable by the Company at their face value of $1,000 per share To date, all interest 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 redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than $300 million.  The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place.  The shares rank senior and have preference to the common shares of Forest.  The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.

As of December 31, 2020, Corbel and VHG, both related parties, held $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly.  The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on the earlier of certain redemption events or December 29, 2027.  The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business.  The shares are redeemable at any time at the option of Company at a redemption price equal to face value.  The shares rank senior and have preference to the common shares of HC LLC.  The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights.these instruments has been paid in-kind.

The HC LLC Series A-1 Preferred Stock includes covenants that limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenanceRecent Developments

On May 4, 2023, Peter A. Reed resigned as GEG’s Chief Executive Officer, effective immediately following the filing of licenses and government approvals and other customary conditions.  In orderGEG’s Form 10-Q for the fiscal quarter ended March 31, 2023. Following his resignation, Mr. Reed entered into a consulting agreement with GEG to incur certain additional debt, DME Inc. must also comply with a leverage ratio and levered free cash flow ratio, which are based in part on the HC LLC EBITDA levels.

The Company has a credit facility with Pacific Mercantile Bankthat accrues interest at the prime rate plus 0.4% (at December 31, 2020, the effective rate was 3.7%) through maturity on November 29, 2022 (the DME Revolver).  The DME Revolver allows for borrowings up to $10 million.  The DME Revolver requires monthly interest payments.  The DME Revolver is secured by all of the assets of the durable medical equipment business and the Company is required to meet certain financial covenants.  The DME Revolver was not drawn as of December 31, 2020.

The DME Revolver includes covenants that restrict DME Inc. business operations to its current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions.  Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of DME Inc.  DME Inc. must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the DME Inc. EBITDA levels.

As of December 31, 2020, the Company had a related party GP Corp. Note due to MAST Capital totaling $3.1 million that accrues interest at a variable rate of three-month LIBOR plus 3.0%, as adjusted for each 90-day period (at December 31, 2020, the effective rate was 3.2%) through maturity on November 3, 2026.  The GP Corp. Note requires minimum annual principal payments of $0.08 million and quarterly interest-only payments.  The GP Corp. Note is secured by the profit sharing agreement between one of our wholly-owned subsidiaries, Great Elm Capital Management, Inc. (GECM)and GECC GP Corp. (the Profit Sharing Agreement) that transfers profits generated by our management of GECC, with no recourse to any of our other assets, entities or operations.

49


The GP Corp. Note is non-recourse to any of the Company’s operations or net assets not related to GECM’s managementprovide transition services to GECC.  The GP Corp. Note may be prepaid at par value at any time with prior written notice to the holders of the GP Corp. Note.  Additionally, GECC GP Corp. is required to prepay the GP Corp. Note upon certain material liquidation transactions including any termination of the Profit Sharing Agreement.

As of December 31, 2020, the Company had a senior note due to Wells Fargo Bank Northwest, National as trustee totaling $48.9 million that accrues interest at a rate of 3.49% through maturity on March 15, 2030 (the Senior Note).  The Senior Note requires monthly principal and interest payments through the maturity date.  The Senior Note is secured by a first lien mortgage on the Property and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations.

The principal and interest due on the Senior Note may be prepaid at the option of the borrower, based on an amount determined by discounting the remaining principal and interest payments at a rate equal to an applicable premium in excess of a rate corresponding to the specified U.S. Treasury security over the remaining average life of the Senior Note.

As of December 31, 2020, the Company had a subordinated note due to Wells Fargo Bank Northwest, National as trustee totaling $4.1 million that accrues interest at a rate of 15.0% through maturity on March 15, 2030 (the Subordinated Note).  The Subordinated Note is a capital appreciation note, whereby the monthly interest is capitalized to the principal balance and due at maturity.  The Subordinated Note is secured by a second lien mortgage on the Property, and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations.

The principal and interest due on the Subordinated Note may be prepaid at the option of the borrower, based on an amount determined by discounting the remaining principal and interest payments at a rate equal to an applicable premium in excess of a rate corresponding to the specified U.S. Treasury security over the remaining average life of the Subordinated Note.

The note agreements for both the Senior Note and the Subordinated Note include negative covenants that restrict the Company’s majority-owned subsidiary, CRIC IT Fort Myers LLC’s (the Property Owner), business operations to ownership and lease of the Property, limit additional indebtedness, require maintenance of insurance and other customary requirements related to the Property.  Events of default include non-payment of amounts when due, inability to pay indebtedness or material change in the business operations or financial condition of the Property Owner or the lease tenant that in the lender’s reasonable determination would reasonably be expected to materially impair the value of the Property, prevent timely repayment of the notes or performance of any material obligations under the notes and related agreements.  The payments under the notes are also guaranteed on a full and several basis by the non-controlling interest holder of the Property Owner.  Both the Senior Note and Subordinated Note are non-recourse to the Company but are secured byfor a period of twelve months. On May 4, 2023, the Property,Board appointed Jason Reese, the rights associated with the leasesExecutive Chairman of GEG’s Board of Directors since 2020, as Chairman and the stock owned by the Company in the Property Owner.

Off-Balance Sheet Arrangements

AsChief Executive Officer of December 31, 2020, we did not have any off-balance sheet arrangements.GEG, effective immediately following Mr. Reed’s resignation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in the market risks discussed in Item 7A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2022.

50


Item 4. Controls and Procedures.

We evaluated the effectiveness of our disclosure controls and procedures as of DecemberMarch 31, 2020.2023. Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that the information we are required to disclose in reports that we file under the Securities Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of DecemberMarch 31, 2020,2023, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting for the quarter ended DecemberMarch 31, 2020,2023, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

No changes required to be disclosed.

32


Item 1A. Risk Factors.

We have disclosed the risk factors affecting our business, financial condition and operating results in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2022. There have been no material changes from the risk factors previously disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

51


Item 6. Exhibits.

EXHIBIT INDEX

All references are to filings by Great Elm Group, Inc. (the Registrantregistrant) with the SEC under File No. 001-39832.

Exhibit

Number Description

Exhibit

Number

Description

2.1

2.1

Purchase Agreement, and Plan of Merger, dated December 21, 2020, by andJanuary 3, 2023, among Great Elm Capital Group, Inc.,Healthcare, LLC, Great Elm Group,DME Holdings, Inc. and Forest Merger Sub,QHM Holdings Inc. (incorporated by reference to Exhibit 2.12.2 to the Form 8-K filed on December 29, 2020)January 3, 2023)

3.1

Certificate of Incorporation of Great Elm Group, Inc., dated October 23, 2020 (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on December 29, 2020)

3.2

Amended and Restated Bylaws of Great Elm Group, Inc., dated October 23, 2020November 14, 2022 (incorporated by reference to Exhibit 3.23.1 to the Form 8-K filed on December 29, 2020)November 14, 2022)

4.131.1*

Form of Great Elm Group, Inc. Common Stock Certificate (incorporated by reference to 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 Great Elm Group, Inc., dated December 23, 2020 (incorporated by reference to Exhibit 4.2 to the Form 8-K filed on December 29, 2020)

4.3

Stockholders’ Rights Agreement, dated as of December 29, 2020, between Great Elm Group, Inc. and Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on December 29, 2020)

4.4

Form of 5.0% Convertible Senior PIK Notes due 2030 (incorporated by reference to Exhibit 4.4 to the Form 8-K filed on December 29, 2020)

4.5

Form of Registration Rights Agreement (incorporated by reference to Exhibit 4.5 to the Form 8-K filed on December 29, 2020)

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of 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

101

Materials from the Great Elm Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended DecemberMarch 31, 2020,2023, formatted in inline Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Notes to the Condensed Consolidated Financial Statements, tagged in detail (furnished herewith).

104

104

The cover page from the Great Elm Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended DecemberMarch 31, 2020,2023, formatted in inline XBRL (included as Exhibit 101).

*Filed or furnished herewith.

5233


SIGNATURES

Pursuant to the requirements 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.

GREAT ELM GROUP, INC.

Date: February 16, 2021May 5, 2023

/s/ Peter A. Reed

Peter A. Reed

Chief Executive Officer

Date: February 16, 2021May 5, 2023

/s/ Brent J. Pearson

Brent J. Pearson

Chief Financial Officer

5334