Item 1. Financial Statements
Item 1. Financial Statements.
2
Great Elm Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
Dollar amounts in thousands (except per share data)
ASSETS
March 31, 2021
June 30, 2020
Current assets:
Cash and cash equivalents
$
24,321
$
40,519
Restricted cash
984
846
Accounts receivable
7,172
7,991
Related party receivables
1,477
1,059
Investments, at fair value (cost $ 40,726 and $ 30,279 , respectively)
18,835
8,705
Inventories
1,187
1,470
Prepaid and other current assets
3,589
738
Assets of consolidated funds
Investments, at fair value (cost $ 25,661 )
25,625
-
Prepaid expenses
94
-
Total current assets
83,284
61,328
Real estate assets, net
52,271
53,188
Property and equipment, net
941
1,410
Equipment held for rental, net
7,148
7,483
Identifiable intangible assets, net
13,854
15,129
Goodwill
50,658
50,010
Right of use assets
5,276
5,392
Other assets
1,825
1,505
Total assets
$
215,257
$
195,445
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
5,780
$
5,007
Accrued expenses and other liabilities
5,619
3,565
Deferred revenue
5,374
5,652
Current portion of lease liabilities
1,828
1,617
Current portion of long term debt
2,460
6,221
Current portion of related party notes payable
-
1,418
Current portion of equipment financing debt
2,155
2,034
Liabilities of consolidated funds
Due to broker and other liabilities
12,248
-
Total current liabilities
35,464
25,514
Lease liabilities, net of current portion
3,720
4,060
Long term debt, net of current portion
51,541
52,781
Related party notes payable, net of current portion
-
26,485
Convertible notes (face value $ 33,530 and $ 30,521 , respectively, including $ 15,857 and $ 13,277 , respectively, held by related parties)
21,036
17,444
Equipment financing debt, net of current portion
83
196
Redeemable preferred stock of subsidiaries (held by related parties, face value $ 37,018 )
35,474
-
Other liabilities
1,020
395
Total liabilities
148,338
126,875
Commitments and Contingencies (Note 18)
Contingently redeemable non-controlling interest
2,055
3,890
Stockholders' equity
Preferred stock, $ 0.001 par value; 5,000,000 authorized and zero outstanding
-
-
Common stock, $ 0.001 par value; 350,000,000 shares authorized and 26,495,976 shares issued and 25,837,000 outstanding at March 31, 2021; and 26,217,380 shares issued and 25,529,534 outstanding at June 30, 2020
26
26
Additional paid-in-capital
3,319,516
3,318,117
Accumulated deficit
( 3,264,214
)
( 3,257,349
)
Total Great Elm Group, Inc. stockholders' equity
55,328
60,794
Non-controlling interests
9,536
3,886
Total stockholders' equity
64,864
64,680
Total liabilities, non-controlling interest and stockholders' equity
$
215,257
$
195,445
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 amounts in thousands (except per share data)
For the three months ended March 31,
For the nine months ended March 31,
2021
2020
2021
2020
Revenues:
Durable medical equipment sales and services revenue
$
8,606
$
8,933
$
27,363
$
25,725
Durable medical equipment rental income
4,511
5,198
14,907
16,028
Investment management revenues
728
829
2,261
2,585
Real estate rental income
1,276
1,276
3,824
3,820
Total revenues
15,121
16,236
48,355
48,158
Operating costs and expenses:
Cost of durable medical equipment sold and services
3,806
3,966
12,716
11,118
Cost of durable medical equipment rentals 1
1,657
2,072
5,193
6,522
Durable medical equipment other operating expenses 2
6,084
8,079
21,834
22,607
Investment management expenses
904
149
2,546
1,504
Real estate expenses
128
125
380
375
Depreciation and amortization
1,048
1,053
3,090
3,250
Selling, general and administrative
1,854
1,801
4,582
4,935
Expenses of consolidated funds
19
-
27
-
Total operating costs and expenses
15,500
17,245
50,368
50,311
Operating loss
( 379
)
( 1,009
)
( 2,013
)
( 2,153
)
Dividends and interest income
554
491
2,408
1,608
Net realized and unrealized loss on investment in GECC
( 1,112
)
( 9,794
)
( 454
)
( 11,603
)
Net realized and unrealized gain on investments of consolidated funds
155
-
221
-
Interest expense
( 2,179
)
( 1,754
)
( 6,047
)
( 5,083
)
Loss on extinguishment of debt
-
-
( 1,866
)
-
Other income, net
-
-
30
3
Loss, before income taxes
( 2,961
)
( 12,066
)
( 7,721
)
( 17,228
)
Income tax benefit (expense)
43
148
( 6
)
5
Net loss
$
( 2,918
)
$
( 11,918
)
$
( 7,727
)
$
( 17,223
)
Less: net loss attributable to non-controlling interest
( 158
)
( 301
)
( 862
)
( 676
)
Net loss attributable to Great Elm Group, Inc.
$
( 2,760
)
$
( 11,617
)
$
( 6,865
)
$
( 16,547
)
Net loss attributable to shareholders per share
Basic
$
( 0.11
)
$
( 0.46
)
$
( 0.27
)
$
( 0.65
)
Diluted
( 0.11
)
( 0.46
)
( 0.27
)
( 0.65
)
Weighted average shares outstanding
Basic
25,757
25,430
25,669
25,401
Diluted
25,757
25,430
25,669
25,401
1 Includes depreciation expense of:
1,478
1,882
4,683
5,895
2 Net of CARES Act Stimulus of:
2,275
-
2,275
-
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 amounts 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
Net loss
-
-
-
( 2,760
)
( 2,760
)
351
( 2,409
)
( 509
)
Issuance of common stock related to vesting of restricted stock
146
0
-
-
0
-
0
-
Non-cash distributions to non-controlling interest holders of DME, Inc.
-
-
-
-
-
( 3
)
( 3
)
( 3
)
Deemed capital contribution related to issuance of convertible notes
-
-
602
-
602
-
602
-
Repurchase of interests in subsidiary
-
-
( 533
)
-
( 533
)
678
145
-
Issuance of LP interests in Consolidated Fund
-
-
-
-
-
3,275
3,275
-
Stock-based compensation
-
-
616
-
616
-
616
-
BALANCE, March 31, 2021
25,837
$
26
$
3,319,516
$
( 3,264,214
)
$
55,328
$
9,536
$
64,864
$
2,055
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 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, 2019
25,353
$
25
$
3,305,415
$
( 3,244,374
)
$
61,066
$
4,016
$
65,082
$
3,912
Net loss
-
-
-
( 3,089
)
( 3,089
)
( 109
)
( 3,198
)
( 80
)
Issuance of common stock related to vesting of restricted stock
30
0
0
-
0
-
0
-
Stock-based compensation
-
-
293
-
293
-
293
-
BALANCE, September 30, 2019
25,383
$
25
$
3,305,708
$
( 3,247,463
)
$
58,270
$
3,907
$
62,177
$
3,832
Net loss
-
-
-
( 1,841
)
( 1,841
)
( 108
)
( 1,949
)
( 78
)
Issuance of common stock related to vesting of restricted stock
29
0
0
-
0
-
0
-
Stock-based compensation
-
-
208
-
208
-
208
-
BALANCE, December 31, 2019
25,412
25
3,305,916
( 3,249,304
)
56,637
3,799
60,436
3,754
Net loss
-
-
-
( 11,617
)
( 11,617
)
( 162
)
( 11,779
)
( 139
)
Issuance of common stock related to vesting of restricted stock
28
-
-
-
-
-
-
-
Stock-based compensation
-
-
( 267
)
-
( 267
)
-
( 267
)
-
Issuance of convertible notes
-
-
12,224
-
12,224
-
12,224
-
BALANCE, March 31, 2020
25,439
$
25
$
3,317,873
$
( 3,260,921
)
$
56,977
$
3,637
$
60,614
$
3,615
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 nine months ended March 31,
2021
2020
Cash flows from operating activities:
Net loss
$
( 7,727
)
$
( 17,223
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization
7,773
9,144
Stock-based compensation
1,330
234
Sales of investments by consolidated funds
4,130
-
Purchases of investments by consolidated funds
( 29,364
)
-
Stock dividends received from GECC
( 1,868
)
-
Unrealized loss on investments
490
11,603
Realized gain on investments
( 257
)
-
Non-cash interest and amortization of debt issuance costs
2,099
722
Loss on extinguishment of debt
1,866
-
Deferred tax benefit
( 3
)
( 116
)
Other non-cash expense, net
1,188
1,070
Gain on sale of equipment held for rental
( 292
)
( 612
)
Change in fair value of contingent consideration
-
( 1,135
)
Changes in operating assets and liabilities:
Related party receivable
( 418
)
250
Accounts receivable
1,445
310
Inventories
496
( 414
)
Prepaid assets, deposits, and other assets
( 2,933
)
( 821
)
Operating leases
( 1,201
)
( 1,071
)
Related party payable
-
( 805
)
Deferred revenues
( 278
)
-
Accounts payable, accrued liabilities and other liabilities
2,360
3,448
Net cash provided by (used in) operating activities
( 21,164
)
4,584
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
( 748
)
-
Purchases of investments
( 75
)
-
Sales of investments
35
-
Participation in related party rights offering
( 8,751
)
-
Purchases of equipment held for rental
( 4,613
)
( 5,384
)
Proceeds from sale of equipment held for rental
862
1,394
Purchases of property and equipment
( 71
)
( 591
)
Proceeds from sale of property and equipment
-
37
Net cash used in investing activities
( 13,361
)
( 4,544
)
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 nine months ended March 31,
2021
2020
Cash flows from financing activities:
Proceeds on revolving line of credit
-
2,550
Principal payments on revolving line of credit
( 3,900
)
( 2,050
)
Principal payments on long term debt
( 1,723
)
( 1,598
)
Principal payments on related party notes payable
( 25,105
)
( 2,123
)
Principal payments on equipment financing debt
( 3,440
)
( 2,065
)
Proceeds from equipment financing debt
2,901
2,338
Capitalized issuance costs
( 1,250
)
( 392
)
Due to broker of consolidated funds
12,060
-
Repurchases of interests in subsidiary
( 68
)
-
Proceeds from convertible notes
-
30,000
Payments of debt extinguishment costs
( 1,627
)
-
Dividends paid to non-controlling interest holders of DME Inc.
( 368
)
-
Issuance of Forest preferred stock
35,010
-
Capital contributions from non-controlling interests in consolidated funds
3,275
-
Proceeds from sale of Forest common stock, gross
2,700
-
Net cash provided by financing activities
18,465
26,660
Net increase (decrease) in cash, cash equivalents and restricted cash
( 16,060
)
26,700
Cash, cash equivalents and restricted cash at beginning of period
41,365
12,830
Cash, cash equivalents and restricted cash at end of period
$
25,305
$
39,530
Cash paid for interest
$
2,231
$
4,585
Non-cash investing and financing activities
Lease liabilities and right of use assets arising from operating leases
$
426
$
607
Contingent consideration
397
-
Distribution of HC LLC (as defined below) preferred stock to non-controlling interest holders of DME Inc.
1,608
-
Repurchase of GP Corp. Note
3,072
-
Issuance of convertible notes
2,250
-
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.
March 31, 2021
June 30, 2020
Cash and cash equivalents
$
24,321
$
40,519
Restricted cash
984
846
Cash, cash equivalents and restricted cash
$
25,305
$
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)
March 31, 2021
1. Organization
Great Elm Group, Inc. (the Company ) is a holding company incorporated in Delaware. The Company currently has 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. The Company is pursuing business development opportunities in durable medical equipment, investment management, real estate and other industries.
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 Securities Exchange Act of 1934, as amended (the Exchange Act ). The Holding Company Reorganization (as defined in Note 5 – Holding Company Reorganization and Financing Transaction) 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 include Great Elm Capital Management, Inc. ( GECM ), Great Elm Opportunities GP, Inc., Great Elm DME Holdings, Inc. and Great Elm DME Manager, LLC ( DME Manager ). 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, Inc. ( DME Inc. ) and Great Elm Healthcare, LLC ( HC LLC ) and its seven wholly-owned subsidiaries. In addition, we have determined that we are the primary beneficiary in each of Great Elm Opportunity Fund I, LP Series C and Great Elm SPAC Opportunity Fund, LLC ( GESOF ), variable interest entities, and therefore the operations of these funds have been included in our consolidated results.
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 which are normally included in the Company’s Form 10-K. 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 consolidated balance sheet as of June 30, 2020, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2020.
9
Use of Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America ( GAAP ) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Included in these estimates and assumptions are items that relate to revenue recognition, 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 to use assets. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries; majority-owned subsidiaries; and subsidiaries in which we hold a controlling financial interest as of the financial statement date. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests. We consolidate a variable interest entity ( VIE ) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and 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 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations.
Segments
The Company has 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. The Company regularly reviews each segment for purposes of allocating resources and assessing performance.
Accounts Receivable
Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors ), based on 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 $ 4.7 million and $ 4.8 million as of March 31, 2021 and June 30, 2020, respectively. During the three and nine months ended March 31, 2021 and 2020, the Company recognized reductions to revenue of $ 2.2 million and $ 4.9 million, and $ 1.1 million and $ 2.6 million, respectively, related to such constraints. See Note 3 – Revenue.
10
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 nine months ended March 31, 2021 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 March 31, 2021 and June 30, 2020, the Company had unbilled receivables of approximately $ 1.4 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.
Net Income (Loss) per Share
The following table presents the calculation of basic and diluted earnings (loss) per share:
For the three months ended March 31,
For the nine months ended March 31,
(in thousands except per share amounts)
2021
2020
2021
2020
Net loss
$
( 2,918
)
$
( 11,918
)
$
( 7,727
)
$
( 17,223
)
Less: net loss attributable to non-controlling interest
( 158
)
( 301
)
( 862
)
( 676
)
Net loss attributable to Great Elm Group, Inc.
$
( 2,760
)
$
( 11,617
)
$
( 6,865
)
$
( 16,547
)
Net loss attributable to shareholders per share
Basic
$
( 0.11
)
$
( 0.46
)
$
( 0.27
)
$
( 0.65
)
Diluted
$
( 0.11
)
$
( 0.46
)
$
( 0.27
)
$
( 0.65
)
Weighted average shares outstanding
Basic
25,757
25,430
25,669
25,401
Diluted
25,757
25,430
25,669
25,401
When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. As of March 31, 2021, the Company had 13,088,564 potential shares of common stock, including 9,656,616 potential shares of Company common stock issuable upon conversion of Convertible Notes (as defined in Note 13 – Convertible Notes) and 3,431,948 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 loss per share calculations because to do so would be antidilutive. As of March 31, 2020, the Company had 3,459,602 potential shares of Company common stock issuable upon exercise of the stock options 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 March 31, 2021 and 2020, the Company had an aggregate of 732,909 issued shares 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 being outstanding for accounting purposes since they are unvested and subject to forfeiture.
Restrictions on Subsidiary Dividends
Under the Senior Note (as defined below) and Subordinated Note (as defined below), 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 (as defined below).
11
Concentration of Risk
The Company’s net investment revenue and receivables for the periods presented were primarily attributable to the management of one investment vehicle, GECC, which is also a related party. See Note 6 – Related Party Transactions.
The Company’s real estate rental revenue is derived from one tenant.
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 March 31,
For the nine months ended March 31,
2021
2020
2021
2020
Government Payor A
29 %
28 %
33 %
28 %
Government Payor B
*
*
*
*
Third-party Payor C
10 %
*
11 %
10 %
* Not a significant concentration.
The following table summarizes customer concentrations as a percentage of accounts receivable:
As of
March 31, 2021
June 30, 2020
Government Payor A
22 %
20 %
Government Payor B
*
11 %
Third-party Payor C
13 %
11 %
* Not a significant concentration
Recently Adopted Accounting Standards
Fair Value Measurements In August 2018, the FASB issued Accounting Standards Update ( 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 .
Recently Issued Accounting Standards
Current Expected Credit Losses In June 2016, the FASB issued 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.
12
Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 , Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the United Kingdom Financial Conduct Authority which announced the desire to phase out the use of the London Interbank Offered Rate ( LIBOR ) by the end of 2021. The provisions provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. If LIBOR ceases to exist, we may need to renegotiate outstanding notes payable outstanding which extend beyond 2021 with the respective counterparties. Adoption 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.
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. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
3. Revenue
The revenues from each major source of revenue are summarized in the following table:
For the three months ended March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Product and Services Revenue
Investment Management
Management Fees
$
613
$
683
$
1,823
$
2,201
Administration Fees
115
146
438
384
728
829
2,261
2,585
Durable Medical Equipment
Equipment Sales
7,309
7,549
23,728
21,497
Service Revenues
1,297
1,384
3,635
4,228
8,606
8,933
27,363
25,725
Total product and services revenue
$
9,334
$
9,762
$
29,624
$
28,310
Rental Revenues
Real Estate
Rental Income
1,276
1,276
3,824
3,820
Durable Medical Equipment
Medical Equipment Rental Income
4,511
5,198
14,907
16,028
Total rental revenue
5,787
6,474
18,731
19,848
Total
$
15,121
$
16,236
$
48,355
$
48,158
13
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.
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 nine months ended March 31, 2021, relating to prior periods.
The payment terms and conditions of customer contracts vary by customer type and the products and services offered.
14
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 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 no other contract liabilities as of March 31, 2021 or December 31, 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 March 31, 2021 and June 30, 2020, net unbilled sales and services revenue is approximately $ 0.9 million and $ 1.2 million, respectively, and is included in accounts receivable.
Investment Management Revenue
The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer. Investment management revenue primarily consists of fees based on a percentage of assets under management; fees based on the performance of managed assets; and administrative 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 agreements GECM has with GECC and other private funds managed by GECM (collectively, the “Funds”). The performance obligation is satisfied over time as the services are rendered, since the Funds simultaneously receive and consume the benefits provided as GECM performs services. Management fee rates range from 1 % to 1.5 % of the management fee assets specified with each agreement. Based on the terms of the specific agreement, management fees may be calculated and billed in advance or in arrears of the period, no less frequently than quarterly. Management fee revenue is recognized over time as the services are provided.
Incentive Fees
The Company earns incentive fees based on the investment management agreements GECM has with GECC and separately managed accounts. 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. Incentive fees are recognized 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 % 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 March 31, 2021, there is $ 9.3 million in incentive fees which have been earned per the terms of the investment management agreements but not recognized as they are still subject to the constraints described above.
15
Administration Fees
The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimburses GECM for costs incurred in performing administrative functions for GECC. This revenue is recognized over time as the services are performed. Administrative 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 that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.
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 nine months ended March 31, 2021, 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 March 31, 2021 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 March 31, 2021 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.
16
4. Acquisitions
Acquisition of Advanced Medical DME, LLC and PM Sleep Lab, LLC
On March 1, 2021 , through its majority-owned subsidiary, DME Inc., the Company acquired Advanced Medical DME, LLC and PM Sleep Lab, LLC ( AMPM ), providers of sleep testing, Positive Air Pressure ( PAP ), and other respiratory products and services in nine locations throughout Kansas and Missouri. The acquisition is accounted for as a business combination. The Company expects to achieve synergies and costs reductions through integrating these operations into our existing durable medical equipment operations. Operating results of the acquired businesses have been included in the consolidated statements of operations since March 1, 2021.
The purchase consideration was $ 1.1 million, comprised of $ 0.4 million paid upon closing net of cash acquired, $ 0.3 placed in escrow for potential satisfaction of certain indemnification obligations, and $ 0.4 million representing the acquisition date fair value of contingent consideration. We have recorded a preliminary allocation of the purchase price for AMPM, which resulted in goodwill of $ 0.7 million and intangible assets, including trade names of $ 0.4 million. Goodwill was assigned to the durable medical equipment segment and is attributable primarily to expected synergies and the assembled workforce of the acquired business. None of the goodwill is expected to be deductible for income tax purposes. The presentation of pro forma financial disclosures are not required in connection with the AMPM acquisition.
The contingent consideration arrangement requires the Company to pay up to $ 2.1 million of additional consideration to the seller if certain revenue thresholds are achieved for the 12 months ended September 1, 2022. The fair value of the contingent consideration arrangement at the acquisition date was $ 0.4 million. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model include volatility of 40.0 % and a discount rate of 10.3 %. The contingent consideration is included within the other liabilities in the consolidated balance sheets.
5. Holding Company Reorganization and Financing Transaction
Holding Company Reorganization
On December 21, 2020 , GEC announced 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.
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 and the Company 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;
17
•
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., 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;
•
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. The Company’s wholly-owned subsidiary, DME Manager, 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 ).
Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility ). See Note 12 – Borrowings.
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.
Durable Medical Equipment
In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into 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 March 31, 2021 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 12 - Borrowings for additional information on the Corbel Facility and Note 15 – 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.
18
Investment Management
The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC. Under these agreements, GECM receives administrative fees, management fees based on GECC’s assets (other than cash and cash equivalents) and incentive fees if GECC has net capital gains or if its net investment income exceeds a specified hurdle rate. Fees under the agreements began to accrue on November 4, 2016. See Note 3 – 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 ). 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’s wholly-owned subsidiary, GECM, serves as the managing member of GESOF, and provides administrative services and manages the investment portfolio of GESOF.
GEOF is a Delaware multi-series limited partnership and GESOF is a Delaware limited liability company. The Company has determined that GEOF, each series of GEOF and GESOF are VIEs and that the criteria for consolidation are met for one series of GEOF, which series was launched in December 2020 and began liquidation in February 2021 when the net assets of such series, which consisted of limited partnership interests in GESOF, were distributed to such series’ sole limited partner, the Company. The Company has determined that the criteria for consolidation are met for GESOF, which was launched in February 2021. The operations of each of these consolidated funds (the Consolidated Funds ) are included in our consolidated financial statements. See Note 2 – Summary of Significant Accounting Policies for additional details.
The Company has retained the specialized investment company accounting guidance under GAAP with respect to the Consolidated Funds. As such, investments of the Consolidated Funds 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 income on the condensed consolidated income statement. Non-controlling interests in these Consolidated Funds are included in net loss attributable to non-controlling interest. As of March 31, 2021 no single issuer or investment of the Consolidated Funds had a fair value greater than 5 % of the Company’s total consolidated assets.
Additionally, the Company receives dividends from its 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 Funds. See Note 7 – Fair Value Measurements.
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)
2021
2020
2021
2020
Change in unrealized loss on investment in GECC
$
( 1,112
)
$
( 9,794
)
$
( 454
)
$
( 11,603
)
Dividend income from GECC
554
489
2,400
1,567
As of
(in thousands)
March 31, 2021
June 30, 2020
Dividends receivable from GECC
$
554
$
163
Investment management revenues receivable
726
746
Receivable for reimbursable expenses paid
207
158
19
Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets. Outstanding receivables from the Consolidated Funds are eliminated in consolidation. As of March 31, 2021, the Company had $ 0.01 million in receivable for reimbursable expenses paid on behalf of the Consolidated Funds.
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 March 31, 2021; 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 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries.
MAST Capital Management, LLC ( MAST Capital ) is the beneficial owner of approximately 7.5 % of the Company’s outstanding common stock as of March 31, 2021. On March 10, 2021, the Company purchased from MAST Capital all of its previously-held shares of GECC GP Corp., the previously-held GP Corp. Note and its previously-held board appointment rights in exchange for $ 2.3 million in newly issued Convertible Notes (as defined below). See Note 12 - Borrowings for additional discussion of the GP Corp. Note and Note 13 – Convertible Notes for additional discussion of the convertible notes.
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 board of directors, is the Chief Executive Officer of ICAM. Costs incurred under this agreement are included in investment management expenses in the condensed consolidated statement of operations. For the three months and nine months ended March 31, 2021, such costs were $ 0.1 million and $ 0.2 million.
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 15 – 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 15 – 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.
20
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.
GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
▪
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
▪
Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
▪
Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below:
Fair Value as of March 31, 2021
Level 1
Level 2
Level 3
Total
Assets:
Investment in GECC
$
18,835
$
-
$
-
$
18,835
Equity investments of Consolidated Funds
$
25,625
$
-
$
-
$
25,625
Total assets
$
44,460
$
-
$
-
$
44,460
Liabilities:
Participation feature of HC LLC Series A-2 Preferred Stock
$
-
$
-
*
*
Contingent consideration liability
$
-
$
-
$
397
$
397
Total liabilities
$
-
$
-
$
397
$
397
*Balance eliminates in consolidation.
Fair Value as of June 30, 2020
(in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Investment in GECC
$
8,705
$
-
$
-
$
8,705
Total assets
$
8,705
$
-
$
-
$
8,705
Liabilities:
Contingent consideration liability
$
-
$
-
$
-
$
-
Total liabilities
$
-
$
-
$
-
$
-
21
The following is a reconciliation of changes in contingent consideration, a Level 3 liability, for the nine months ended March 31, 2021 and 2020:
For the nine months ended March 31,
(in thousands)
2021
2020
Beginning balance
$
-
$
1,135
Additions
397
-
Payments
-
-
Change in fair value
-
( 1,135
)
Ending balance
$
397
$
-
There were no transfers between levels of the fair value hierarchy during the nine months ended March 31, 2021 and 2020.
The previous contingent consideration arrangement required the Company to pay up to $ 2.1 million of additional consideration to the former shareholders of the durable medical equipment businesses if certain earnings before interest, taxes, depreciation and amortization ( EBITDA ) thresholds, as adjusted per the terms of the purchase agreement, were achieved for the 12 months ended December 31, 2019. 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, the fair value of the contingent consideration was updated to zero . 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.
In conjunction with the acquisition of AMPM on March 1, 2021, the Company entered into a separate contingent consideration agreement that requires the Company to pay up to $ 2.1 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model as of March 31, 2021 include volatility of 40.0 % and a discount rate of 10.3 %. The contingent consideration is included within the other liabilities in the consolidated balance sheets.
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 15 – 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 an option pricing model based on the estimated value of HC LLC derived from a discounted cash flow income approach and a guideline public company market approach. The key assumptions in applying the valuation approach as of March 31, 2021 include financial forecasts of the durable medical equipment business, a discount rate of 15.5 % and a volatility rate of 66.9 % (level 3 inputs in accordance with the GAAP fair value hierarchy). The fair value of the embedded derivative as of the issuance date and as of March 31, 2021 was $ 6.5 million and $ 11.3 million respectively. Since 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 zero within the table above. However, this valuation does impact our segment results and non-controlling interest accounts.
The Company is the owner of approximately 23.6 % (or 5,539,724 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 input in accordance with the GAAP fair value hierarchy).
22
8. 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)
March 31, 2021
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
( 3,754
)
( 2,837
)
Net carrying amount
$
52,271
$
53,188
Property and Equipment
Leasehold improvements
$
830
$
858
Vehicles
232
237
Computer equipment and software
356
277
Furniture and fixtures
391
417
Sleep study equipment
577
589
2,386
2,378
Accumulated depreciation
( 1,445
)
( 968
)
Net carrying amount
$
941
$
1,410
Medical Equipment Held for Rental
Medical equipment held for rental
$
14,501
$
13,828
Accumulated depreciation
( 7,353
)
( 6,345
)
Net carrying amount
$
7,148
$
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 March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Depreciation and amortization
$
510
$
478
$
1,454
$
1,433
Cost of durable medical equipment rentals
1,478
1,882
4,683
5,895
Total depreciation expense
$
1,988
$
2,360
$
6,137
$
7,328
9. 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 $ 50.7 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 beginning in September 2018.
23
The changes in the carrying value of goodwill are as follows:
For the nine months ended March 31,
(in thousands)
2021
2020
Beginning balance
$
50,010
$
50,397
Acquisition of businesses
648
-
Purchase accounting adjustment
-
36
Ending balance
$
50,658
$
50,433
The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in thousands):
As of March 31, 2021
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
$
9,056
$
( 2,273
)
$
6,783
$
8,800
$
( 1,613
)
$
7,187
Hospital Contracts
90
( 4
)
86
-
-
-
Non-compete agreements
1,370
( 811
)
559
1,360
( 573
)
787
10,516
( 3,088
)
7,428
10,160
( 2,186
)
7,974
Investment Management
Investment management agreement
3,900
( 2,200
)
1,700
3,900
( 1,887
)
2,013
Assembled workforce
526
( 297
)
229
526
( 255
)
271
4,426
( 2,497
)
1,929
4,426
( 2,142
)
2,284
Real Estate
In-place lease
6,028
( 1,531
)
4,497
6,028
( 1,157
)
4,871
Total
$
20,970
$
( 7,116
)
$
13,854
$
20,614
$
( 5,485
)
$
15,129
Aggregate Amortization Expense (in thousands)
2021
2020
For the three months ended March 31,
$
1,080
$
574
For the nine months ended March 31,
1,631
1,816
Estimated Future Amortization Expense (in thousands) :
For the three months ending June 30, 2021
$
553
For the year ending June 30, 2022
2,070
For the year ending June 30, 2023
1,967
For the year ending June 30, 2024
1,768
For the year ending June 30, 2025
1,658
Thereafter
5,838
Total
$
13,854
24
10. 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.
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 two 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 12 - 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 March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Revenues from base rents
$
1,151
$
1,151
$
3,453
$
3,453
Revenues from additional rental payments
125
121
371
367
Total rental revenues
$
1,276
$
1,272
$
3,824
$
3,820
25
The following table summarizes the base rents for the remaining lease term:
(in thousands)
Base Rent Payments
For the three months ending June 30, 2021
$
1,068
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
$
43,001
11. 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)
March 31, 2021
June 30, 2020
Facilities
Right of use assets
$
5,135
$
6,066
Current portion of lease liabilities
1,770
1,371
Lease liabilities, net of current portion
3,637
4,989
Total liabilities
$
5,407
$
6,360
Weighted-average remaining life
3.4 years
4.4 years
Weighted-average discount rate
11.4
%
11.7
%
Vehicles
Right of use assets
$
104
$
80
Current portion of lease liabilities
29
18
Lease liabilities, net of current portion
75
62
Total liabilities
$
104
$
80
Weighted-average remaining life
3.6 years
3.7 years
Weighted-average discount rate
10.1
%
12.3
%
Equipment
Right of use assets
$
37
$
93
Current portion of lease liabilities
29
34
Lease liabilities, net of current portion
8
59
Total liabilities
$
37
$
93
Weighted-average remaining life
. 9 years
2.6 years
Weighted-average discount rate
10.8
%
12.5
%
26
As of March 31, 2021, the Company had remaining right of use assets of $ 5.3 million and lease liabilities of $ 5.5 million (consisting of $ 1.8 million in current portion of lease liabilities and $ 3.7 million in lease liabilities, net of current portion on the condensed consolidated balance sheet) related to the leases discussed herein.
Operating lease costs are included in the operating expense associated with the business segment leasing the asset on the statements of operations and are included in cash flows from operating activities on the statements of cash flows. 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 March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Facilities
Operating lease cost
$
559
$
514
$
1,638
$
1,561
Cash paid for operating leases
527
524
1,616
1,535
Vehicles
Operating lease cost
$
23
$
6
$
37
$
20
Cash paid for operating leases
9
6
23
20
Equipment
Operating lease cost
$
12
$
11
$
34
$
33
Cash paid for operating leases
12
11
34
33
The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases:
(in thousands)
For the three months ending June 30, 2021
$
606
For the year ending June 30, 2022
2,271
For the year ending June 30, 2023
1,570
For the year ending June 30, 2024
1,127
For the year ending June 30, 2025
635
Thereafter
480
Total lease payments
$
6,689
Imputed interest
( 1,141
)
Total lease liabilities
$
5,548
Durable Medical Equipment
The facility leases include offices, retail and warehouse space and sleep labs. The leases have original or amended terms ranging from 12 to 96 months , some of 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 after the first 13 months of the lease subject to certain early termination costs, including residual value guarantees. The lease costs include variable payments for taxes and other fees.
Equipment 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 extend or purchase at the end of the lease term. Certain of these leases include additional rental costs for taxes, insurance and additional fees in addition to the base rental costs.
27
Investment Management 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-eight months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty-month period.
The lease payments commenced on October 1, 2017, four months after the Company began to occupy the space. On an annual basis, the lease payments increase at an average rate of approximately 2.4 % from $ 28 to $ 32 thousand per month.
12. Borrowings
Related party borrowings of the Company’s subsidiaries are summarized in the following table:
(in thousands)
Subsidiaries
March 31, 2021
June 30, 2020
Corbel Facility
DME Inc. and subsidiaries
$
-
$
25,106
GP Corp. Note
GP Corp.
-
3,072
Total principal
$
-
$
28,178
Unamortized debt issuance cost
-
( 275
)
Total long-term related party notes payable
-
27,903
Less current portion of related party notes payable
-
( 1,418
)
Related party notes payable, net of current portion
$
-
$
26,485
The Company’s subsidiaries’ other outstanding borrowings are summarized in the following table:
(in thousands)
Subsidiaries
March 31, 2021
June 30, 2020
DME Revolver
DME Inc. and subsidiaries
$
-
$
3,900
Equipment Financing
DME Inc. and subsidiaries
2,238
2,230
Senior Note
CRIC IT
48,281
50,004
Subordinated Note
CRIC IT
4,253
3,803
Total principal
$
54,772
$
59,937
Unamortized debt premiums
3,263
3,251
Unamortized debt discounts and issuance costs
( 1,796
)
( 1,956
)
Total other outstanding borrowings
56,239
61,232
Less current portion of other outstanding borrowings
( 4,615
)
( 8,255
)
Other outstanding borrowings, net of current portion
$
51,624
$
52,977
The Company incurred interest expense of $ 1.5 million and $ 1.6 million for the three months ended March 31, 2021 and 2020, respectively. The Company incurred interest expenses of $ 4.2 million and $ 4.9 million for the nine months ended March 31, 2021 and 2020, respectively.
28
The Company’s aggregate future required principal debt repayments are summarized in the following table:
(in thousands)
Principal Due
For the three months ending June 30, 2021
$
1,552
For the year ending June 30, 2022
3,738
For the year ending June 30, 2023
2,759
For the year ending June 30, 2024
2,906
For the year ending June 30, 2025
3,126
Thereafter
52,708
Total
$
66,789
Outstanding principal on related party borrowings
$
-
Outstanding principal on other borrowings
54,772
Future interest to be paid-in-kind
12,017
Total future required principal payments
$
66,789
Additional details of each borrowing by operating segment are discussed below.
Durable Medical Equipment
In connection with the acquisition of 80.1 % of DME Inc., the Company assumed the Corbel Facility with a principal balance of $ 8.5 million, which was amended and increased to $ 25 million concurrent with the closing of the first acquisition of the durable medical equipment businesses in September 2018. 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 remaining outstanding principal balance of $ 24.8 million was repaid on December 29, 2020. The repayment included deferred structuring fees of $ 0.6 million, prepayment premiums and settlement fees of $ 1.0 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 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 6 – Related Party Transactions and Note 15 – 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 March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Principal payments
$
-
$
807
$
25,106
$
2,123
Interest expense
-
793
1,296
3,251
The DME Revolver had a balance of $ 0.0 million at March 31, 2021 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 March 31, 2021 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 March 31, 2021 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.
29
The DME Revolver includes covenants that restrict DME Inc. ’s and its subsidiaries’ business operations to the 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. and its subsidiaries on a consolidated basis must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the DME Inc. EBITDA levels. T he obligations under 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 nine months ended March 31, 2021 and 2020, 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. On March 10, 2021 GEG purchased the GP Corp. Note as well as non-controlling interests in GECC GP Corp. and certain board appointment rights from MAST Capital. In exchange, GEG issued $ 2.3 million of Convertible Notes. As MAST Capital is a related party, no gain was recorded on the transaction. The difference in carrying value between the instruments purchased (including the GP Corp. Note and MAST Capital’s non-controlling interests) and that of the newly issued convertible notes was treated as a capital contribution and recorded to additional paid in capital in the amount of $ 0.6 million.
Payments and interest expense incurred on the GP Corp. Note are summarized in the following table:
For the three months ended March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
Principal payments
$
-
$
-
$
-
$
-
Interest expense
22
42
73
130
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.
30
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 10 – Lessor Operating Leases.
13. 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 ). In addition, on March 10, 2021, the Company issued additional Convertible Notes to MAST Capital in an aggregate principal amount of $ 2.3 million. As of March 31, 2021 the total principal balance of Convertible Notes outstanding was $ 33.5 million including cumulative interest paid-in-kind. The Convertible Notes are held by a consortium of investors, including $ 15.9 million issued to certain related parties. Such Convertible Notes issued to related parties include:
▪
$ 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.
▪
$ 2.3 million issued to MAST Capital, owner of 7.6 % of our outstanding company stock.
The Convertible Notes accrue interest at 5.0 % per annum, payable semiannually in arrears on June 30 and December 31, commencing June 30, 2020, in cash or in kind at the option of the Company. 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.
31
The embedded conversion feature in the Convertible Notes qualifies for the scope exception to derivative accounting in 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 on the original $ 30 million issuance 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 million in issuance costs on the original issuance, which were allocated ratably between the debt and equity portions of the instrument. Both the debt discount and debt issuance costs are being amortized over the 10 -year Convertible Notes term and are netted with the principal balance within convertible debt on our condensed consolidated balance sheet. As the cash conversion option had expired prior to the issuance of the incremental Convertible Notes issued and paid-in-kind, no bifurcation was required on these issuances, and such Convertible Notes were recorded at par.
The Company incurred interest expense of $ 0.7 million and $ 0.2 million related to the convertible notes for the three months ended March 31, 2021 and 2020, respectively. The Company incurred interest expense of $ 1.8 million and $ 0.2 million for the nine months ended March 31, 2021 and 2020, respectively.
14. CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ( CARES Act ) 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 the 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 prior 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 SBA seeking full forgiveness 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.
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 .
32
On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded certain benefits made available under the CARES Act, including modifying and extending the Employee Retention Credit ( ERC ). As modified, the ERC provides eligible employers with less than 500 employees a refundable tax credit against the employer’s share of social security taxes. The ERC is equal to 70 % of qualified wages paid to employees during calendar 2021 for a maximum credit per employee of $ 7,000 per employee for each calendar quarter through June 30, 2021. During the quarter ended March 31, 2021, the Company claimed ERCs of $ 2.5 million, consisting of $ 2.3 million recognized as a reduction to operating expenses and $ 0.2 million acquired in purchase accounting. Such claimed ERCs not settled prior to quarter end were settled shortly thereafter and are disclosed as a separate current asset line item on our consolidated balance sheet. We will continue to monitor our eligibility for this credit during the quarter ending June 30, 2021.
15. Non-Controlling Interests and 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 subsidiary balances on the condensed consolidated balance sheets:
(in thousands)
March 31, 2021
June 30, 2020
DME Inc.
Temporary equity
2,055
3,890
Permanent equity
2,055
3,890
Total DME Inc.
4,110
7,780
GP Corp.
Permanent equity
( 187
)
( 782
)
GE FM Holdings
Permanent equity
823
778
GESOF
Permanent equity
3,126
-
Forest
Permanent equity
3,720
-
Total Non-controlling interests
$
11,592
$
7,776
The following table summarizes the net income (loss) attributable to the non-controlling interests on the condensed consolidated statements of operations:
For the three months ended March 31,
For the nine months ended March 31,
(in thousands)
2021
2020
2021
2020
DME Inc.
Temporary equity
( 509
)
( 139
)
( 846
)
( 297
)
Permanent equity
( 509
)
( 139
)
( 846
)
( 297
)
Total DME Inc.
( 1,018
)
( 278
)
( 1,692
)
( 594
)
GP Corp.
Permanent equity
( 26
)
( 37
)
( 86
)
( 122
)
GE FM Holdings
Permanent equity
15
14
45
40
GESOF
Permanent equity
( 148
)
-
( 148
)
-
Forest
Permanent equity
1,019
-
1,019
-
Total
$
( 158
)
$
( 301
)
$
( 862
)
$
( 676
)
33
Non-controlling interest in DME Inc. classified as temporary equity
In connection with the acquisition of the durable medical equipment businesses in September 2018, the Company issued a 9.95 % common stock equity ownership in DME Inc. The holder of the interest has a board observer rights for the DME Inc. board of directors, but no voting rights. DME Inc. has the right of first offer if the holder desires to sell the security and in the event of a sale of DME Inc., the holder must sell their securities (drag along rights) and has the right to participate in sales of DME Inc. securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder owns 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of DME Inc. has not commenced and (iii) the holder has not had an earlier opportunity to sell its shares at their fair market value, the holder has the right to request a marketing process for a sale of DME Inc. and has the right to put its common shares to DME Inc. at the price for such shares implied by such marketing process. The Company also has the right to call the holder’s common shares at such price. The holder of the non-controlling interest is entitled to participate in earnings of DME Inc. and is not required to fund losses. As the redemption is contingent upon future events outside of the Company’s control which are not probable, the Company has classified the non-controlling interest as temporary equity and its fair value on the date of issuance, adjusted for any earnings in DME Inc.
The holder of this non-controlling interest, Corbel, is also the holder of the Series A-1 Preferred Stock and previously was the holder of the Corbel Facility . See Note 6 – Related Party Transactions and Note 12 – 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, the Company issued one of the former owners, a 9.95 % common stock equity ownership in DME Inc. The rights are consistent with the non-controlling interest classified as temporary equity, other than the holder does not have a contingent put right. Accordingly, 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.
GECC GP Corp. – Non-controlling interest classified as permanent equity
In connection with the acquisition of the investment management business in November 2016, the Company issued certain affiliates and employees of the Company a 19.9 % interest in GP Corp. During the quarter ended March 31, 2021, the Company repurchased 15.6 % of such interests, leaving a 4.3 % non-controlling interest in GP Corp. as of March 31, 2021.
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.
Forest – Non-controlling interest classified as permanent equity
In connection with the JPM Transactions on December 29, 2020, the Company sold JPM a 20.0 % common stock interest in Forest in exchange for $ 2.7 million. JPM has a representative on the Forest board of directors and the right to designate a number of directors commensurate with their common stock ownership interest. Forest has the right of first offer if the holder desires to sell the security and in the event of 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 entitled to participate in earnings of Forest and is not required to fund losses.
The holder of this non-controlling interest, JPM, is also the holder of Forest Preferred Stock discussed below. See Note 6 – Related Party Transactions.
34
GESOF – Non-controlling interest classified as permanent equity
As of March 31, 2021, GEG held 76.8 % of the capital in the fund. The remaining 23.2 % of capital in GESOF is recorded as a non-controlling interest. These non-controlling interests of GESOF include affiliated individuals and entities.
Redeemable Preferred Stock of Subsidiaries
The following table summarizes the preferred stock of subsidiary balances on the condensed consolidated balance sheets:
(in thousands)
March 31, 2021
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
33,918
-
Total preferred stock classified as liability
$
35,474
$
-
HC LLC - Series A-1 Preferred Stock classified as a liability
In connection with the JPM Transactions, the Company issued 10,090 shares of Series A-1 Preferred Stock with a face value of $ 1,000 per share at issuance. The shares were issued pro-rata to the stockholders of DME Inc. in the form of a distribution and no consideration was provided in exchange for such instruments. 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.
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 6 – 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.
35
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 % 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, 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.
We have identified the feature allowing holders of the HC LLC Series A-2 Preferred Stock to participate in up to 33% 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 host 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 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 holder 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 stock 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 to 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 by the Company at their face value of $ 1,000 per share on December 29, 2027 , or at a 0 - 3 % premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The 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 in interest expense in the consolidated statement of operations.
The fair value of each share of Forest Preferred Stock on the issuance date was determined to equal its face value based on the transaction price. Debt issuance costs of $ 1.2 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 holder of the Forest Preferred Stock is JPM, who is also the holder of the non-controlling interests in Forest discussed above. See Note 6 – Related Party Transactions.
36
16. Stockholders’ Equity
Restricted Stock Awards (Performance Shares) and Restricted Stock Units
During the nine months ended March 31, 2021, there were no awards or forfeitures of restricted stock awards included in the below table and 732,909 remain outstanding as of March 31, 2021. 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-year 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 March 31, 2021, the Company estimates that approximately 241,347 of the restricted stock awards are probable of vesting under the performance condition.
Restricted stock units are subject to service requirements. The Company accounts for forfeitures of the restricted stock units in the period incurred. During the three and nine months ended March 31, 2021 the Company granted 18,120 and 305,299 shares of restricted stock units, respectively, to employees and directors.
The activity of the Company’s restricted stock awards and units for the nine months ended March 31, 2021 was as follows:
Restricted Stock Awards and Restricted Stock Units
Restricted Stock
(in thousands)
Weighted Average Grant Date Fair Value
Outstanding at June 30, 2020
941
$
3.71
Granted
305
2.66
Vested
( 307
)
2.61
Forfeited
-
-
Outstanding at March 31, 2021
939
$
3.73
Stock Options
The following table summarizes the Company’s option award activity as of and through March 31, 2021:
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
18
3.51
-
-
Exercised
-
-
-
-
Forfeited, cancelled or expired
-
-
-
-
Outstanding at March 31, 2021
2,493
$
3.69
5.01
$
-
Exercisable at March 31, 2021
1,887
$
3.65
4.36
$
-
Vested and expected to vest as of March 31, 2021
2,493
$
3.69
4.76
$
-
During the three months ended March 31, 2021 and 2020, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $ 0.6 million and $ 0.3 million, respectively. During the nine months ended March 31, 2021 and 2020, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $ 1.3 million and $ 0.2 million, respectively.
As of March 31, 2021, unrecognized compensation costs associated with outstanding stock and stock-linked awards totaled approximately $ 1.7 million.
37
17. Income Tax
As of June 30, 2020, the Company had net operating loss ( NOL ) carryforwards for federal and state income tax purposes of approximately $ 1.5 billion and $ 203 million, respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2021 through 2037 . The federal NOL carryforwards generated in fiscal year 2018 or later can be carried forward indefinitely. The state NOL carryforwards will expire from 2029 through 2038 . The Company assesses NOL carryforwards based on taxable income on an annual basis.
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.
18. Commitments and Contingencies
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any 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.
19. Segment Information
The Company allocates resources based on 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. 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 March 31, 2021
(in thousands)
Durable Medical Equipment
Investment Management
Real Estate
General Corporate
Intercompany Eliminations (1)
Consolidated Total
Revenue:
Total revenue
$
13,117
$
739
$
1,276
$
162
$
( 173
)
$
15,121
Operating costs and expenses:
Cost of durable medical equipment sold and services
( 3,806
)
-
-
-
-
( 3,806
)
Cost of durable medical equipment rentals
( 1,657
)
-
-
-
-
( 1,657
)
Depreciation and amortization
( 508
)
( 109
)
( 430
)
( 1
)
-
( 1,048
)
Stock-based compensation (2)
-
( 181
)
-
( 435
)
-
( 616
)
Transaction costs (3)
( 107
)
-
-
( 155
)
-
( 262
)
Other selling, general and administrative
( 6,023
)
( 723
)
( 128
)
( 1,410
)
173
( 8,111
)
Total operating expenses
( 12,101
)
( 1,013
)
( 558
)
( 2,001
)
173
( 15,500
)
Other income (expense):
Interest expense
( 1,280
)
( 25
)
( 645
)
( 1,460
)
1,231
( 2,179
)
Other income (expense)
( 4,795
)
-
-
5,623
( 1,231
)
( 403
)
Total other expense, net
( 6,075
)
( 25
)
( 645
)
4,163
-
( 2,582
)
Total pre-tax income (loss)
$
( 5,059
)
$
( 299
)
$
73
$
2,324
$
-
$
( 2,961
)
38
For the three months ended March 31, 2020
(in thousands)
Durable Medical Equipment
Investment Management
Real Estate
General Corporate
Intercompany Eliminations (1)
Consolidated Total
Revenue:
Total revenue
$
14,131
$
829
$
1,276
$
34
$
( 34
)
$
16,236
Operating costs and expenses:
Cost of durable medical equipment sold and services
( 3,966
)
-
-
-
-
( 3,966
)
Cost of durable medical equipment rentals
( 2,072
)
-
-
-
-
( 2,072
)
Depreciation and amortization
( 472
)
( 150
)
( 430
)
( 1
)
-
( 1,053
)
Stock-based compensation (2)
-
373
-
( 106
)
-
267
Transaction costs (3)
-
-
-
( 286
)
-
( 286
)
Other general and administrative
( 8,113
)
( 522
)
( 125
)
( 1,409
)
34
( 10,135
)
Total operating expenses
( 14,623
)
( 299
)
( 555
)
( 1,802
)
34
( 17,245
)
Other income (expense):
Interest expense
( 906
)
( 39
)
( 654
)
( 155
)
-
( 1,754
)
Other income (expense)
-
-
-
( 9,303
)
-
( 9,303
)
Total other expense, net
( 906
)
( 39
)
( 654
)
( 9,458
)
-
( 11,057
)
Total pre-tax income (loss)
$
( 1,398
)
$
491
$
67
$
( 11,226
)
$
-
$
( 12,066
)
For the nine months ended March 31, 2021
(in thousands)
Durable Medical Equipment
Investment Management
Real Estate
General Corporate
Intercompany Eliminations (1)
Consolidated Total
Revenue:
Total revenue
$
42,270
$
2,272
$
3,824
$
298
$
( 309
)
$
48,355
Operating costs and expenses:
Cost of durable medical equipment sold and services
( 12,716
)
-
-
-
-
( 12,716
)
Cost of durable medical equipment rentals
( 5,193
)
-
-
-
-
( 5,193
)
Depreciation and amortization
( 1,433
)
( 364
)
( 1,291
)
( 2
)
-
( 3,090
)
Stock-based compensation (2)
-
( 572
)
-
( 758
)
-
( 1,330
)
Transaction costs (3)
( 194
)
-
-
( 416
)
-
( 610
)
Other selling, general and administrative
( 21,822
)
( 1,974
)
( 380
)
( 3,562
)
309
( 27,429
)
Total operating expenses
( 41,358
)
( 2,910
)
( 1,671
)
( 4,738
)
309
( 50,368
)
Other income (expense):
Interest expense
( 2,676
)
( 76
)
( 1,942
)
( 2,584
)
1,231
( 6,047
)
Other income (expense)
( 6,631
)
-
-
8,201
( 1,231
)
339
Total other income (expense), net
( 9,307
)
( 76
)
( 1,942
)
5,617
-
( 5,708
)
Total pre-tax income (loss)
$
( 8,395
)
$
( 714
)
$
211
$
1,177
$
-
$
( 7,721
)
39
For the nine months ended March 31, 2020
(in thousands)
Durable Medical Equipment
Investment Management
Real Estate
General Corporate
Intercompany Eliminations (1)
Consolidated Total
Revenue:
Total revenue
$
41,753
$
2,585
$
3,820
$
114
$
( 114
)
$
48,158
Operating costs and expenses:
Cost of durable medical equipment sold and services
( 11,118
)
-
-
-
-
( 11,118
)
Cost of durable medical equipment rentals
( 6,522
)
-
-
-
-
( 6,522
)
Depreciation and amortization
( 1,449
)
( 508
)
( 1,291
)
( 2
)
-
( 3,250
)
Stock-based compensation (2)
-
100
-
( 334
)
-
( 234
)
Transaction costs (3)
-
-
-
( 863
)
-
( 863
)
Other selling, general and administrative
( 22,721
)
( 1,604
)
( 375
)
( 3,738
)
114
( 28,324
)
Total operating expenses
( 41,810
)
( 2,012
)
( 1,666
)
( 4,937
)
114
( 50,311
)
Other income (expense):
Interest expense
( 2,839
)
( 122
)
( 1,967
)
( 155
)
-
( 5,083
)
Other income (expense)
3
-
-
( 9,995
)
-
( 9,992
)
Total other income (expense), net
( 2,836
)
( 122
)
( 1,967
)
( 10,150
)
-
( 15,075
)
Total pre-tax income (loss)
$
( 2,893
)
$
451
$
187
$
( 14,973
)
$
-
$
( 17,228
)
(1)
The Company’s wholly-owned subsidiary, 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. Beginning December 29, 2020, DME Manager also provides advisory services to Forest and receives a consulting fee from Forest for those services. Both DME Manager and Forest are part of general corporate operations, and the corresponding revenue and expense are eliminated in consolidation. Additionally, 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.
40
The following tables illustrate assets by segment:
As of March 31, 2021
(in thousands)
Durable Medical Equipment
Investment Management
Real Estate
General Corporate
Total
Fixed assets, net
$
8,061
$
26
$
52,271
$
2
$
60,360
Identifiable intangible assets, net
7,428
1,929
4,497
-
13,854
Goodwill
50,658
-
-
-
50,658
Other assets
20,751
2,932
2,660
64,042
90,385
Total
$
86,898
$
4,887
$
59,428
$
64,044
$
215,257
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
41
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.