What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2021-02-16 · 105 added, 89 removed, 237 unchanged (45% of the section changed)

5 unchanged sentences

Our investment management business manages a business development company, Great Elm Capital Corp.

( GECC ), a credit-focused private fund, Great Elm Opportunities Fund I, LP, and separate accounts for an institutional investor.

The combined assets under management of these entities at December 31, 2020 was approximately $228.1 million.

( GECC ), a credit-focused private fund, Great Elm Opportunities Fund I, LP, a Special Purpose Acquisition Company (SPAC)- focused fund, Great Elm SPAC Opportunity Fund, LLC, and separate accounts for an institutional investor.

The combined assets under management of these entities at March 31, 2021 was approximately $245.7 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 ).

5 unchanged sentences

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.

On December 29, 2020, Great Elm Group, Inc.

(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.

9 unchanged sentences

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 ( VH G ).

Great Elm Healthcare, LLC ( 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 Great Elm DME, Inc.

) , which in turn distributed such preferred stock pro rata to the holders of its common stock such that 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 ;

5 unchanged sentences

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

The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC, concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $0.45 million.

(each collectively noted above, the JPM Transactions ).

1 unchanged sentence

paid off the term loan with Corbel (the Corbel Facility ).

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.

During the three and nine months ended March 31, 2021, 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.

2 unchanged sentences

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.

However, the Company expects to continue 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 effect on our business and operations.

13 unchanged sentences

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.

generally accepted accounting principles ( GAAP ).

generally accepted accounting principles.

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 six months ended December 31, 2020, 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, 2020 as it relates to recurring transactions.

During the nine months ended March 31, 2021, 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, 2020 as it relates to recurring transactions.

Results of Operations

2 unchanged sentences

The following table provides the results of our consolidated 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,

Percent Change

13 unchanged sentences

Total pre-tax income (loss)

The increases in revenues for the three and six months ended December 31, 2020 as compared to the corresponding periods in the prior year are primarily attributable to organic growth 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-ups and increased revenue reserve constraints, as well as decrease in management fees earned from our investment management business.

Revenues for the three months ended March 31, 2021 decreased $1.1 million as compared to the corresponding period in the prior year.

Durable medical equipment revenues decreased $1.0 million due to the continued suppressed referral pipeline for new equipment set-ups and increased revenue reserve constraints, partially offset by organic growth in resupply sales and one month of contributions from the PM Sleep Lab, LLC acquisition, Investment management revenues decreased $0.1 million related to lower management fees earned on managed portfolios during the quarter.

Revenues for the nine months ended March 31, 2021 increased $0.2 million as compared to the corresponding period in the prior year, consisting of an increase of $0.5 million in durable medical equipment and partially offset by $0.3 million decrease in investment management fees.

The increase in durable medical equipment revenue is primarily attributable to organic growth in resupply sales partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups and increased revenue reserve constraints, as well as decrease in management fees earned from our investment management business.

Investment management revenues decreased $0.3 million related to lower management fees earned on managed portfolios during the quarter.

Operating costs and expenses

The increase in operating costs for the three and six months ended December 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.

Operating costs for the three months ended March 31, 2021 decreased $1.8 million as compared to the corresponding period in the prior year.

The decrease is primarily related to $2.3 million in Employee Retention Credits claimed during the quarter under the enhanced Coronavirus Aid, Relief, and Economic Security Act ( CARES Act ).

In addition, costs of rentals at our durable medical equipment business decreased $0.4 million as demand for new equipment set-ups remained suppressed during the pandemic.

These decreases were partially offset by a $0.5 million benefit in the prior period in connection with updated estimates related to performance-based awards, which were awarded in connection with internal restructuring in September 2017.

Such benefit did not recur in the current period.

The remaining offsetting increase of $0.4 million is primarily related to increased payroll related and consulting costs.

Operating costs for the nine months ended March 31, 2021 were relatively flat.

This comparison includes the offsetting increases of durable medical equipment costs of goods sold of $1.6 million due to related sales growth, a non-recurring benefit in the prior year of $0.7 million in connection with updated estimates related to performance-based awards and increased payroll related and consulting costs, as well as decreases of $2.3 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act, a reduction in durable medical equipment costs of rentals of $1.2 million due to softened demand during the pandemic and a reduction in amortization expense of intangible assets of $0.2 million.

Other income (expense)

Interest expense 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.

Interest expense increased for the three and nine months ended March 31, 2021, as compared to the three and nine months ended March 31, 2020, primarily due to interest expense associated with the Convertible Notes the Company issued at par with an aggregate principal balance of $32.3 million due February 26, 2030 (the Convertible Notes ).

Other income and expense for the three and nine months ended March 31, 2021 and 2020 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 and nine months ended March 31, 2021.

There was no corresponding activity in the prior periods presented in the table above.

4 unchanged sentences

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,

For the three months ended March 31,

For the nine months ended March 31,

(in thousands)

16 unchanged sentences

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 million and $1.1 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.

For the three months ended March 31, 2021, revenues from the sale of medical equipment and sleep study services were $7.3 million and $1.3 million, respectively, while for the three months ended March 31, 2020, such revenues were $7.5 million and $1.4 million, respectively.

While gross medical equipment sales increased $0.3 million versus the corresponding period in the prior year, primarily attributable to organic growth of CPAP resupply sales, we also incurred increased revenue reserve constraints which offset this increase.

For the nine months ended March 31, 2021, revenues from the sale of medical equipment and sleep study services were $23.7 million and $3.6 million respectively, while for the nine months ended March 31, 2020 such revenues were $21.5 million and $4.2 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 partially offset by increases in revenue reserve constraints, 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 nine months ended March 31, 2021, rental revenue was $4.5 million and $14.9 million, respectively, as compared to $5.2 million and $16.0 million, respectively, for the three and nine months ended March 31, 2020.

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 is 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.

Revenue reserve constraints increased $0.5 million and $1.5 million, respectively during the three and nine months ended March 31, 20201 as compared to the corresponding periods in the prior year.

This decrease in revenues is attributable to several factors, including collections experience during the pandemic and the resulting composition of receivables at period end.

Durable Medical Equipment Operating Costs and Expenses

1 unchanged sentence

Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses.

The increase in operating costs for the three months ended December 31, 2020 as 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.

The decrease in operating costs for the three months ended March 31, 2021 as compared to the corresponding period in the prior year is primarily attributable to $2.2 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act, and decreases in costs of goods sold and cost of rentals corresponding with decreases in related revenues.

The decrease in operating costs for the nine months ended March 31, 2021 as compared to the corresponding period in the prior year is also primarily attributable to $2.2 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act.

In addition, we incurred higher costs of goods sold and lower cost of rentals, which corresponded to related changes in revenue.

Our margins 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.

In addition to these factors, for the nine months ended March 31, 2021 and 2020, payroll related costs were $16.5 million and $15.2 million, respectively excluding the impact on Employee Retention Credits.

The increases in payroll related costs were primarily related to an accrued management bonus plan in the current year that was not present in the prior comparable period, a shared services agreement between GEG and DME Inc.

and the conversion of consultants to full-time employees (which had a corresponding decrease in consulting fees of $0.4 million).

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.

For the three and nine months ended March 31, 2021, freight and postage expenses were $0.5 million and $1.3 million, respectively, as compared to $0.3 million and $0.9 million, respectively, for the three and nine months ended March 31, 2020.

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.

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 .

Depreciation and amortization for the three and nine months ended March 31, 2021 decreased as compared to comparable periods in the prior year 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.

The increase in interest expense for the three months ended March 31, 2021 as compared to the corresponding period in the prior year is attributable primarily to higher outstanding principal balances of the HC LLC preferred stock of $44.1 million as compared to $33.4 million outstanding under the Corbel Facility and DME Revolver (as defined below) as of March 31, 2020.

The decrease in interest expense for the nine months ended March 31, 2021 as compared to the corresponding period in the prior year is primarily attributable to a smaller outstanding principal balance of the Corbel Facility and DME Revolver prior to being paid in full on December 29, 2020.

Prior to the repayment, the outstanding principal was $25.3 million which compared to $33.4 million as of March 31, 2020.

During the three and nine months ended March 31, 2021, the Company recognized a $ 4 .

8 million charge within the durable medical equipment business related to the recurring fair value adjustment of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest.

This has an off-setting impact in our General Corporate activity and eliminates in consolidation.

During the three and nine months ended March 31, 2021, the Company recognized a $1.9 million loss on the extinguishment of the Corbel Term Loan, which was paid in full in December 2020.

Investment Management Business

3 unchanged sentences

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,

For the three months ended March 31,

For the nine months ended March 31,

(in thousands)

16 unchanged sentences

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.

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.

For three and nine months ended March 31, 2021, management fees were $0.6 million and $1.8 million, respectively, and administrative fees were $0.1 million and $0.4 million, respectively.

For the three and nine months ended March 31, 2020, management fees were $0.7 million and $2.2 million, respectively, and administrative fees were $0.1 million and $0.4 million, respectively.

The decrease in management fees for the three and nine months ended March 31, 2021 as compared to the three and nine months ended March 31, 2020 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.

Great Elm Capital Management, Inc.

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 nine months ended March 31, 2021.

Stock-based compensation was impacted by a non-recurring benefit in connection with updated estimates related to performance-based awards of $0.5 million and $0.7 million for the three and nine months ended March 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.

The increase in general and administrative costs for the three and nine months ended March 31, 2021 as compared to the three and nine months ended March 31, 2020, is primarily attributable to an increase in allocated payroll costs and consulting fees.

Interest expense for the three and nine months ended March 31, 2021 decreased as compared to the three and nine months ended March 31, 2020 due to the decrease in the London Interbank Offered Rate, on which the interest rate is based.

Real Estate Business

1 unchanged sentence

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,

For the three months ended March 31,

For the nine months ended March 31,

(in thousands)

13 unchanged sentences

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 for the three and nine months ended March 31, 2021 was consistent with the three and nine months ended March 31, 2020.

Real estate rental revenue consists of rents received from the Class A office buildings in Fort Meyers, Florida.

4 unchanged sentences

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,

For the three months ended March 31,

For the nine months ended March 31,

(in thousands)

15 unchanged sentences

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.

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

In addition to this revenue, the three and nine months ended March 31, 2021, revenue includes $0.1 million in fees earned by DME Manager relating to consulting services provided to Forest Investments, Inc.

General Corporate Costs and Expenses

1 unchanged sentence

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.

Stock-based compensation increased $0.3 million and $0.4 million for the three and nine months ended March 31, 2021, respectively as compared to the corresponding periods in the prior year.

The increase was due primarily to the election of certain directors to receive their compensation in the form of shares instead of cash, which had a corresponding decrease in other general and administrative.

The decrease in other general and administrative costs for the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020 is primarily attributable to the impact of director stock-based compensation discussed above as well as 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.

This decrease is partially offset by $0.1 million in fees charged to Forest by DME Manager relating to consulting services.

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 the Company’s investment in GECC increased through stock distributions received and participation in the GECC rights offering in October 2020.

In addition, the Company recognized net unrealized gains of $2.6 million and $0.7 million for the three and six months ended December 31, 2020, respectively, and net unrealized losses of $0.8 million and $1.8 million for the three and six months ended December 31, 2019, respectively.

Interest expense for the three and nine months ended March 31, 2021 consists primarily of interest on the Convertible Notes, as well as on Forest Preferred Stock, which was issued in December 2020.

The corresponding periods in the prior year only include one month of interest on the Convertible Notes and no interest on the Forest Preferred Stock, as it was not outstanding in the prior periods.

Other income (expense) primarily consists of dividends and unrealized losses on the Company’s investment in GECC as well as intercompany interest income on HC LLC Preferred Stock held by our Corporate subsidiary Forest.

Dividend income increased for the three and nine months ended March 31, 2021 as compared to the corresponding periods in the prior year as the Company’s investment in GECC increased through stock distributions received and participation in the GECC rights offering in October 2020.

In addition, the Company recognized net unrealized losses of $1.1 million and $0.5 million for the three and nine months ended March 31, 2021, respectively, and net unrealized losses of $9.8 million and $11.6 million for the three and nine months ended March 31, 2020, respectively.

Our investment in GECC is marked-to-market by reference to the closing price on Nasdaq as of each period end.

Intercompany interest income related to HC LLC Preferred Stock was $1.2 million for the three and nine months ended March 31, 2021, with no corresponding amounts in the prior periods as this Preferred Stock was not outstanding during that time.

In addition, during the three and nine months ended March 31, 2021, General Corporate recognized $4.8 million benefit related to the recurring fair value adjustment of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest.

This has an off-setting impact in our durable medical equipment business and eliminates in consolidation.

As of June 30, 2020, the Company had NOL carryforwards for federal and state income tax purposes of approximately $1.5 billion and $203 million, respectively.

4 unchanged sentences

Liquidity and Capital Resources

Cash flows used in operating activities for the six months ended December 31, 2020 were $1.7 million.

The net cash outflow was primarily the result of our net loss of $4.8 million, $3.3 million in purchases of investments made by the consolidated fund and $1.4 million of distributions received in stock from the Company’s investment in GECC.

These outflows were partially offset by non-cash inflows of $5.2 million related to depreciation and amortization and $1.9 million related to amortization of debt issuance costs.

Cash flows provided by operating activities for the six months ended December 31, 2019 were $3.1 million.

The net cash inflow was primarily the result of our net loss of $5.3 million offset by non-cash charges of $8.2 million.

Cash flows used in operating activities for the nine months ended March 31, 2021 were $21.2 million.

The net cash outflow was primarily the result of our net loss of $7.7 million, $25.4 million in net purchases of investments made by the consolidated funds and $1.9 million of distributions received in stock from the Company’s investment in GECC.

These outflows were partially offset by non-cash inflows of $7.8 million related to depreciation and amortization, $2.1 million related to amortization of debt issuance costs, $1.9 million related to loss on extinguishment of debt and $1.3 million in stock-based compensation.

Cash flows provided by operating activities for the nine months ended March 31, 2020 were $4.6 million.

The net cash inflow in our continuing operations was primarily the result of our net loss of $17.2 million offset by non-cash charges of $21.7 million.

Additional net cash inflows from operations are attributable to an increase of $3.5 million in accounts payable, accrued liabilities and other liabilities partially offset by outflows due to decreases of $1.1 million and $0.8 million related to operating leases and related party payables, respectively.

The fluctuations in these accounts are due to the timing of cash payments and cash receipts in the normal course of business.

Cash flows used in investing activities for the six months ended December 31, 2020 were $11.4 million.

Cash flows used in investing activities for the nine months ended March 31, 2021 were $13.4 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 $4.6 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.

C ash flows used in investing activities for the nine months ended March 31, 2020 were $4.5 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 for the six months ended December 31, 2019 were $3.6 million which primarily consisted of principal payments on long term debt, related party notes payable and our revolving line of credit.

Cash flows provided by financing activities for the nine months ended March 31, 2021 were $18.5 million which primarily consisted of $37.7 million in gross proceeds from the JPM Transactions, $12.1 million in margin borrowing due to broker from investment purchases in the consolidated funds, capital contributions from non-controlling interests in the consolidated funds of $3.3 million and $2.9 million in proceeds from new equipment financing debt.

Such inflows were partially offset by principal payments of $34.1 million on our debt, including $31.0 million used to pay off the Corbel Facility, $1.6 million in payments of debt extinguishment costs and debt issuance costs of $1.3 million in connection with the JPM Transactions.

Cash flows provided by financing activities for the nine months ended March 31, 2020 were $26.7 million which primarily consisted of issuance of Convertible Notes during February 2020, offset by principal payments on long term debt, related party notes payable and our revolving line of credit.

Financial Condition

As of December 31, 2020, we had an unrestricted cash balance of $32.9 million.

We also hold 5,425,644 shares of GECC common stock with an estimated fair value of $19.5 million as of December 31, 2020.

As of March 31, 2021, we had an unrestricted cash balance of $24.3 million.

We also hold 5,539,724 shares of GECC common stock with an estimated fair value of $18.8 million as of March 31, 2021.

We intend to make acquisitions or investments that we believe will result in 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.

As of December 31, 2020, the Company had $31.3 million face value in Convertible Notes outstanding.

As of March 31, 2021, the Company had $33.5 million face value in Convertible Notes outstanding.

The Convertible Notes are held by a consortium of investors, including related parties.

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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.

As of March 31, 2021, 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.

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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.

As of March 31, 202 1 , Corbel and VHG, both related parties, held a combined $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.

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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 Bank that 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 Company has a credit facility with Pacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (at March 31, 2021, 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.

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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 was not drawn as of March 31, 2021.

The DME Revolver includes covenants that restrict DME Inc.

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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.

Note requires minimum annual principal payments of $0.08 million and quarterly interest-only payments.

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.

Note is non-recourse to any of the Company’s operations or net assets not related to GECM’s management services to GECC.

Note may be prepaid at par value at any time with prior written notice to the holders of the GP Corp.

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 ).

As of March 31, 2021, the Company had a senior note due to Wells Fargo Bank Northwest, National as trustee totaling $48.3 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.

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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 ).

As of March 31, 2021, the Company had a subordinated note due to Wells Fargo Bank Northwest, National as trustee totaling $4.3 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.

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Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements.

As of March 31, 2021, we did not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis