What changed in this filing

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Item 1. Financial Statements

2021-11-12 compared with 2021-05-14 · 427 added, 504 removed, 750 unchanged (55% of the section changed)

3 unchanged sentences

Dollar amounts in thousands (except per share data)

March 31, 2021

September 30, 2021

June 30, 2021

1 unchanged sentence

Cash and cash equivalents

Restricted cash

Accounts receivable

3 unchanged sentences

Assets of consolidated funds

Investments, at fair value (cost $ 25,661 )

Prepaid expenses

Investments, at fair value (cost $ 26,955 and $ 26,814 , respectively)

Prepaid expenses and other assets

Total current assets

Real estate assets, net

Property and equipment, net

8 unchanged sentences

Current portion of lease liabilities

Current portion of long term debt

Current portion of related party notes payable

Current portion of equipment financing debt

Liabilities of consolidated funds

Due to broker and other liabilities

Current portion of capitalized equipment financing

Liabilities of consolidated funds- accrued expenses and other

Total current liabilities

Lease liabilities, net of current portion

Long term debt, net of current portion

Related party notes payable, net of current portion

Convertible notes (face value $ 33,530 and $ 30,521 , respectively, including $ 15,857 and $ 13,277 , respectively, held by related parties)

Convertible notes (face value $ 34,346 , including $ 16,231 held by related parties)

Equipment financing debt, net of current portion

8 unchanged sentences

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;

350,000,000 shares authorized and 26,692,033 shares issued and 26,093,185 outstanding at September 30, 2021;

and 26,613,913 shares issued and 25,948,100 outstanding at June 30, 2021

10 unchanged sentences

Dollar amounts in thousands (except per share data)

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

Durable medical equipment sales and services revenue

1 unchanged sentence

Investment management revenues

Real estate rental income

Total revenues

4 unchanged sentences

Investment management expenses

Real estate expenses

Depreciation and amortization

2 unchanged sentences

Total operating costs and expenses

Operating loss

Operating income (loss)

Dividends and interest income

Net realized and unrealized loss on investment in GECC

Net realized and unrealized gain on investments of consolidated funds

Net realized and unrealized loss on investment

Net realized and unrealized loss on investments of consolidated funds

Interest expense

Loss on extinguishment of debt

Other income, net

Loss, before income taxes

Income (loss) from continuing operations, before income taxes

Income tax benefit (expense)

net loss attributable to non-controlling interest

Income (loss) from continuing operations

Discontinued operations:

Income from discontinued operations, net of tax

Net income (loss)

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

net income attributable to non-controlling interest, discontinued operations

Net loss attributable to Great Elm Group, Inc.

Net loss attributable to shareholders per share

Basic and diluted income (loss) per share from:

Continuing operations

Discontinued operations

Weighted average shares outstanding

1 unchanged sentence

(2) Net of CARES Act Stimulus of:

(3) Net of CARES Act Stimulus of:

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

8 unchanged sentences

BALANCE, June 30, 2021

Issuance of interests in Consolidated Funds, net

Issuance of common stock related to vesting of restricted stock

1 unchanged sentence

BALANCE, September 30, 2021

Issuance of common stock related to vesting of restricted stock

Distributions to non-controlling interest holders of DME Inc.

Issuance of Forest common stock

Stock-based compensation

BALANCE, December 31, 2020

Issuance of common stock related to vesting of restricted stock

Non-cash distributions to non-controlling interest holders of DME, Inc.

Deemed capital contribution related to issuance of convertible notes

Repurchase of interests in subsidiary

Issuance of LP interests in Consolidated Fund

Stock-based compensation

BALANCE, March 31, 2021

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

10 unchanged sentences

BALANCE, September 30, 2020

Issuance of common stock related to vesting of restricted stock

Stock-based compensation

BALANCE, December 31, 2019

Issuance of common stock related to vesting of restricted stock

Stock-based compensation

Issuance of convertible notes

BALANCE, March 31, 2020

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

2 unchanged sentences

Dollar amounts in thousands

For the nine months ended March 31,

For the three months ended September 30,

Cash flows from operating activities:

Net income (loss)

Net income from discontinued operations

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

4 unchanged sentences

Stock dividends received from GECC

Unrealized loss on investments

Realized gain on investments

Unrealized loss on investments from consolidated funds

Realized loss on investments from consolidated funds

Unrealized (gain) loss on investments

Realized loss on investments

Non-cash interest and amortization of debt issuance costs

Loss on extinguishment of debt

Deferred tax benefit

Deferred tax expense (benefit) related to continuing operations

Other non-cash expense, net

6 unchanged sentences

Operating leases

Related party payable

Deferred revenues

Accounts payable, accrued liabilities and other liabilities

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

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

Net cash provided by (used in) operating activities

3 unchanged sentences

Sales of investments

Participation in related party rights offering

Purchases of equipment held for rental

1 unchanged sentence

Purchases of property and equipment

Proceeds from sale of property and equipment

Net cash used in investing activities- continuing operations

Net cash used in investing activities- discontinued operations

Net cash used in investing activities

3 unchanged sentences

Dollar amounts in thousands

For the nine months ended March 31,

For the three months ended September 30,

Cash flows from financing activities:

Proceeds on revolving line of credit

Principal payments on revolving line of credit

Principal payments on long term debt

Principal payments on related party notes payable

1 unchanged sentence

Proceeds from equipment financing debt

Capitalized issuance costs

Due to broker of consolidated funds

Repurchases of interests in subsidiary

Proceeds from convertible notes

Payments of debt extinguishment costs

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

Issuance of Forest preferred stock

Capital contributions from non-controlling interests in consolidated funds

Proceeds from sale of Forest common stock, gross

Net cash provided by financing activities- continuing operations

Net cash provided by financing activities- discontinued operations

Net cash provided by financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Cash paid for interest

2 unchanged sentences

Contingent consideration

Distribution of HC LLC (as defined below) preferred stock to non-controlling interest holders of DME Inc.

Repurchase of GP Corp.

Issuance of convertible notes

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

Restricted cash

Cash, cash equivalents and restricted cash

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

September 30, 2021

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.

(referred to as the Company or GEG ) is a holding company incorporated in Delaware.

The Company currently has two business operating segments:

durable medical equipment and investment management, 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 and other industries.

Investment Management

On September 27, 2016, the Company’s wholly-owned SEC-registered investment advisor subsidiary Great Elm Capital Management, Inc.

( GECM ), a Delaware corporation, entered into an investment management agreement (the IMA ) with Great Elm Capital Corp.

( GECC ), a publicly-traded business development company incorporated in Maryland.

On November 3, 2016, Full Circle Capital Corporation merged with and into GECC and GECM hired the employees of MAST Capital Management, LLC ( MAST Capital ), a Delaware limited liability company, to manage the assets of GECC.

Through the Company’s majority-owned subsidiary, GECC GP Corp.

), the Company acquired assets and assumed related liabilities associated with the on-going operations of GECM.

A portion of the non-controlling interest of GP Corp.

was owned by MAST Capital, and its affiliates and officers.

In March 2021, the Company purchased all interests in GP Corp.

held by MAST Capital and its affiliates.

On June 29, 2021, GP Corp assigned the rights to the Profit Sharing Agreement (as defined in Note 6 – Related Party Transactions) with GECM, their intercompany obligation under the GP Corp.

Note (as defined in Note 12 – Borrowings) and other assets and liabilities to their wholly-owned subsidiary Great Elm Capital GP, LLC ( GEC GP ).

Subsequent to the assignment, the Company exchanged their 98.2 % interests in GP Corp.

for an identical 98.2 % direct interest in GP Corp.’s wholly-owned subsidiary GEC GP.

Following the consummation of the taxable reorganization, the Company no longer has an interest in GP Corp.

Durable Medical Equipment

On September 7, 2018, the Company, through its majority-owned subsidiary, Great Elm DME Holdings, Inc.

( DME Holdings ), acquired an 80.1 % equity interest in Great Elm DME, Inc.

) an entity formed to acquire and combine two companies, Valley Healthcare Holding, LLC and Northwest Medical, LLC., which both specialize in the distribution of respiratory care equipment, including primarily positive air pressure equipment and supplies, ventilators and oxygen equipment and operate in Arizona, Nebraska Oregon, Washington and Alaska.

The Company has subsequently expanded its durable medical equipment business to Kansas, Iowa, and Missouri through acquisitions in 2019 and 2021.

On May 31, 2021, our wholly-owned subsidiary DME Holdings exchanged their 80.1 % interests in DME Inc.

for an identical 80.1 % direct interest in DME Inc.’s subsidiary Great Elm Healthcare, LLC ( HC LLC ), which is the sole owner of the durable medical equipment operating subsidiaries.

Following the consummation of the taxable reorganization, the Company no longer has an interest in DME Inc.

General Corporate

On December 29, 2020, the Company completed a reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc.

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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.

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 Holding Company Reorganization (as defined in Note 6 – Related Party Transactions) 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.

) 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.

Discontinued Operations

We launched our real estate business in March 2018 with an investment of $ 2.7 million in a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property).

The Property was fully-leased, on a triple-net basis, to a single tenant through March 31, 2030.

On June 23, 2021, the Company sold its real estate business for $ 4.6 million in cash.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries.

Wholly-owned subsidiaries include GECM, Great Elm Opportunities GP, Inc.

( GEO GP ), Great Elm FM Acquisition, Inc.

( FM Acquisition ), DME Holdings and Great Elm DME Manager, LLC ( DME Manager ).

Majority-owned subsidiaries (including those divested during the year) include Forest, GEC GP, GP Corp., Great Elm FM Holdings, Inc.

( FM Holdings ), CRIC IT Fort Myers, LLC, DME Inc.

and HC LLC and its eight wholly-owned subsidiaries.

In addition, we have determined that the Company is the primary beneficiary of certain variable interest entities, and therefore the operations of those entities have been included in our consolidated results for the relevant periods.

Summary of Significant Accounting Policies

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The condensed consolidated balance sheet as of June 30, 2021, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2021.

Use of Estimates

All assets and liabilities related to discontinued operations are excluded from the notes unless otherwise noted.

In addition, the historical results of the real estate business operating segment have been reflected in the accompanying consolidated statements of operations for the three months ended September 30, 2020 as discontinued operations.

See Note 4 – Discontinued Operations.

Use of Estimate

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.

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 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.

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Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations.

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 has two business operating segments:

durable medical equipment and investment management, 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.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase.

Cash equivalents consist primarily of exchange-traded money market funds.

The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.

Accounts Receivable

5 unchanged sentences

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.

The revenue reserves related to constraints on variable consideration were $ 2.1 million and $ 2.5 million as of September 30, 2021 and June 30, 2021, respectively.

During the three months ended September 30, 2021 and 2020, the Company recognized reductions to revenue of $ 1.0 million and $ 1.1 million respectively, related to such constraints.

See Note 3 – Revenue.

1 unchanged sentence

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.

There were no material adjustments to revenues made in the three months ended September 30, 2021 relating to prior periods.

Changes in constraints on variable consideration are recorded as a component of net revenues.

2 unchanged sentences

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.

As of September 30, 2021 and June 30, 2021, the Company had unbilled receivables of approximately $ 0.2 million and $ 0.3 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.

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,

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

For the three months ended September 30,

(in thousands except per share amounts)

net loss attributable to non-controlling interest

Income (loss) from continuing operations

Income from discontinued operations, net of tax

Net income (loss)

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

net income attributable to non-controlling interest, discontinued operations

Net loss attributable to Great Elm Group, Inc.

Net loss attributable to shareholders per share

Weighted average shares outstanding

Weighted average shares basic and diluted:

Weighted average shares of common stock outstanding

Weighted average shares used in computing income (loss) per share

Basic and diluted income (loss) per share from:

Loss from continuing operations

Income from discontinued operations

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.

As of September 30, 2021, the Company had 13,429,986 potential shares of common stock, including 9,891,734 potential shares of Company common stock issuable upon conversion of Convertible Notes that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive.

As of September 30, 2020, the Company had 12,134,751 potential shares of common stock, including 8,790,049 shares of common stock issuable upon the conversion of the Company Convertible Notes, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive.

As of September 30, 2021 and 2020, the Company had an aggregate of 811,360 and 732,909 issued shares, respectively, that are subject to forfeiture by the employee at a nominal price if service and/ or 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.

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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.

The Company’s net investment revenue and receivables for the periods presented were primarily attributable to the management of one investment vehicle, GECC.

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,

Government Payor A

Government Payor B

Third-party Payor C

* Not a significant concentration.

For the three months ended September 30,

Government Payor

Third-party Payor

Revenue concentration percentages have been recast from those previously reported to reflect the presentation of the real estate business within discontinued operations

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

March 31, 2021

September 30, 2021

June 30, 2021

Government Payor A

Government Payor B

Third-party Payor C

* Not a significant concentration

Government Payor

Third-party Payor

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 .

Accounting for Convertible Instruments In August 2020, the Financial Accounting Standards Board ( FASB ) issued Accounting Standard Update ( 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 is 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 adopted this ASU on July 1, 2021 using the full retrospective method.

Prior to adoption, under Accounting Standards Codification 470-20, Debt with Conversion and Other Options ("ASC 470-20"), we had separately accounted for the liability and equity components upon the original issuance of our Convertible Notes in February 2020 due to the existence of a temporary cash conversion feature.

Under ASC 470-20, the equity component of the Convertible Notes was recorded as additional paid-in capital within stockholders’ equity on our consolidated balance sheet and generated an original issue discount on the carrying value of the Convertible Notes.

As a result, prior to the adoption of ASU 2020-06, we recorded a greater amount of non-cash interest expense as the discounted carrying value is accreted up to their face value over the Convertible Notes term.

Under the full retrospective method, the prior period condensed consolidated financial statements have been retrospectively adjusted to reflect the adoption of the accounting standard in those periods.

The following tables shows the impact of the adoption on our previously reported financial information:

Condensed consolidated balance sheet

June 30, 2021 As reported

ASU 2020-06 Adjustment

June 30, 2021 As adjusted

Convertible notes

Other liabilities

Stockholders' equity

Additional paid-in-capital

Accumulated deficit

Condensed consolidated statement of operations

For the three months ended

September 30, 2020 As reported (1)

ASU 2020-06 Adjustment

September 30, 2020 As adjusted

Non-operating expenses

Interest expense

Net loss per share (basic and diluted)

As re-casted to reflect the operations of our real estate business as discontinued operations and therefore excluded.

Recently Issued Accounting Standards

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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.

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,

For the three months ended September 30,

(in thousands)

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Rental Revenues

Rental Income

Durable Medical Equipment

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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.

There were no material changes in estimates recorded in the three months ended September 30, 2021, relating to prior periods.

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

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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.

However, during the quarter ended June 30, 2020, the Company applied for and received $ 4.4 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS) under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic.

CMS began recoupments during fiscal 2021, leaving a remaining balance of $ 3.5 million as of June 30, 2021.

During the three months ended September 30, 2021, we issued recoupments of $ 1.2 million, leaving a remaining balance of $ 2.3 million as of September 30, 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.

The Company has no other contract liabilities as of September 30, 2021 or June 30, 2021.

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.

As of September 30, 2021 and June 30, 2021, net unbilled sales and services revenue is approximately $ 0.1 million and $ 0.2 million, respectively, and is included in accounts receivable.

Investment Management Revenue

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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.

As of September 30, 2021, there is $ 10.0 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.

Administration Fees

18 unchanged sentences

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.

There were no material changes in estimates recorded in the three months ended September 30, 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.

Deferred revenue related to rentals was $ 1.0 million and $ 1.0 million as of September 30, 2021 and June 30, 2021, 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.

As of September 30, 2021 and June 30, 2021, net unbilled rental revenue is approximately $ 0.1 million and $ 0.1 million, respectively, and is included in accounts receivable.

Discontinued Operations

On June 23, 2021, the Company’s majority-owned indirect subsidiary FM Acquisition, entered into an agreement with Monomoy Properties Fort Myers, LLC ( Monomoy FM ) to sell the Company’s real estate business to Monomoy FM.

Pursuant to the terms of the Purchase Agreement, the proceeds of the sale were subsequently reinvested in newly issued membership interests of Monomoy Properties, LLC ( Monomoy Properties ), a privately-held fund comprised of a portfolio of net leased industrial real estate assets.

The sale of the real estate business, which has historically been disclosed as its own reportable segment, represents a strategic shift away from the direct ownership and operation of real estate properties.

Accordingly, our historical financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations.

As a passive investor in Monomoy Properties and with a membership interest of approximately 5 %, we have determined that we have no significant continuing involvement with the real estate business.

The following table provides a reconciliation of the Company’s net income from discontinued operations presented in the consolidated statements of operations:

For the three months ended September 30,

(in thousands)

Discontinued operations:

Real estate rental revenue

Real estate expenses

Depreciation and amortization

Interest expense

Net income from discontinued operations

Acquisition of MedOne Healthcare LLC

On August 31, 2021 , through its majority-owned subsidiary, HC LLC, the Company acquired the power mobility assets of MedOne Healthcare LLC ( MedOne ) high service power mobility provider in Arizona.

The acquisition is accounted for as a business combination.

The Company expects this acquisition to achieve synergies 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 August 31, 2021.

The purchase consideration was $ 2.0 million, comprised of $ 1.25 million paid at closing, $ 0.25 million of amounts due to seller pending satisfaction of certain indemnification obligations, and $ 0.5 million representing the acquisition date fair value of contingent consideration.

We have recorded a preliminary allocation of the purchase price for MedOne, which resulted in goodwill of $ 1.9 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.

All 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 MedOne acquisition.

The contingent consideration arrangement requires the Company to pay up to $ 1.0 million of additional consideration to the seller if certain revenue thresholds are achieved for each of the 12 month periods ending September 1, 2022, and 2023.

The fair value of the contingent consideration arrangement at the acquisition date was $ 0.5 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 23.3 % and a discount rate of 10.3 %.

The contingent consideration is included within other liabilities in the consolidated balance sheets.

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.

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, and other respiratory products and services in nine locations throughout Kansas and Missouri.

The acquisition is accounted for as a business combination.

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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.

The purchase consideration was $ 1.1 million, comprised of $ 0.4 million paid at 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.

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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.

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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.

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;

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;

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.

The contingent consideration is included within other liabilities in the consolidated balance sheets.

Related Party Transactions

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In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc.

and its subsidiaries entered into the Corbel Facility.

and its subsidiaries entered into a term loan (the Corbel Facility ) with Corbel Capital Partners SBIC, L.P.

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.

As a result of the acquisition, at September 30, 2021 Corbel holds a non-controlling interest in HC LLC.

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.

In conjunction with the JPM Transactions (as defined below), the Corbel Facility was repaid early on December 29, 2020, and DME Inc.

paid a deferred structuring fee as well as a prepayment penalty.

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to the former owners, including Corbel discussed above.

These non-controlling interests in DME Inc.

became non-controlling interests in HC LLC in May 2021.

See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiary.

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.

The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC and other investment products.

Under these agreements, GECM receives administrative fees, management fees based on the managed assets (other than cash and cash equivalents) and incentive fees based on the performance of those assets.

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 ).

The Company’s wholly-owned subsidiary, GEO GP, serves as the general partner of Great Elm Opportunities Fund I, LP ( GEOF ), a Delaware multi-series limited partnership.

GECM serves as the investment manager of GEOF.

As the general partner, GEO GP provides administrative services and oversees GECM’s management of the investment portfolio of GEOF.

The Company’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 Company’s wholly-owned subsidiary, GECM, serves as the managing member of Great Elm SPAC Opportunity Fund, LLC ( GESOF ), and provides administrative services and manages the investment portfolio of GESOF.

The Company has determined that GEOF, each series of GEOF and GESOF are VIEs and 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.

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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.

As of September 30, 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.

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,

For the three months ended September 30,

(in thousands)

Change in unrealized loss on investment in GECC

Dividend income from GECC

Net (loss) on investments

Net (loss) on investments of consolidated funds

Dividend income

(in thousands)

March 31, 2021

September 30, 2021

June 30, 2021

Dividends receivable from GECC

Dividends receivable

Investment management revenues receivable

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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.

As of September 30, 2021, the Company had $ 0.1 million in receivable for reimbursable expenses paid on behalf of the Consolidated Funds.

The Company is the owner of approximately 20.4 % of the outstanding shares of GECC, valued at $ 19.1 million as of September 30, 2021, 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 directors 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.

GECM has a profit sharing agreement with the Company’s majority-owned subsidiary GEC GP ( Profit Sharing Agreement ).

Under the Profit Sharing Agreement, GECM’s profit from GECC is paid to GEC GP.

Since its inception in November 2016, GECM has operated at a cumulative loss through September 30, 2021;

correspondingly, no profits were available to GEC GP under the Profit Sharing Agreement.

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).

As of September 30, 2021 MAST Capital is the beneficial owner of approximately 7.4 % of the Company’s outstanding common stock and $ 2.3 million in Convertible Notes (as defined below).

See Note 12 - Borrowings for additional discussion of the GP Corp.

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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.

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.

For the three months ended September 30, 2021, such costs were $ 0.1 million.

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.

On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC.

Reese, the Executive Chairman of the Company’s Board of Directors, is an Executive Committee Member of Imperial Capital, LLC.

The agreement includes a retainer fee of $ 0.1 million which was paid during the quarter as well as certain success-based fees related to potential future transactions.

Additionally, the Company receives dividends from its investment in Monomoy Properties and earns unrealized profits and losses based on the mark-to-market performance of its underlying assets in Monomoy

Monomoy Properties is managed by ICAM.

The following tables summarize activity and outstanding balances between Monomoy Properties and the Company:

For the three months ended September 30,

(in thousands)

Net gain on investment

Dividend income

Dividend receivable

In conjunction with the JPM Transactions, on December 29, 2020 Forest sold Forest Preferred Stock (as defined below) and the Company sold common stock in Forest to J.P.

Morgan Broker-Dealer Holdings Inc.

( JPM ), a Delaware corporation and affiliate of JPMorgan Chase & Co., 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.

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This investment is included in prepaid and other current assets on our consolidated balance sheet.

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.

Financing Transaction

Following the consummation of the Holding Company Reorganization, JPM, 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;

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, 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 distributed to the owners of DME Inc.

cash of $ 1.9 million and reimbursed GEG $ 1.3 million to cover deal costs;

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 Corbel Facility.

See Note 12 – Borrowings.

Fair Value Measurements

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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

Investment in GECC

Fair Value as of September 30, 2021

Equity investments

Equity investments of Consolidated Funds

Total assets within the fair value hierarchy

Investments valued at net asset value

Participation feature of HC LLC Series A-2 Preferred Stock

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(in thousands)

Investment in GECC

Equity investments

Equity investments of Consolidated Funds

Total assets within the fair value hierarchy

Investments valued at net asset value

Participation feature of HC LLC Series A-2 Preferred Stock

Contingent consideration liability

Total liabilities

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,

There were no transfers between levels of the fair value hierarchy during the three months ended September 30, 2021 and 2020.

The following is a reconciliation of changes in contingent consideration, a Level 3 liability, for the three months ended September 30, 2021 and 2020:

For the three months ended September 30,

(in thousands)

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Ending balance

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 valuation techniques applied to investments held by the Company and by the Consolidated Funds vary depending on the nature of the investment.

Equity and equity-related securities

Securities traded on a national securities exchange are stated at the close price on the valuation date.

To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level 1.

Investments in private funds

The Company values investments in private funds using net asset value ( NAV ) as reported by each fund’s investment manager.

The private funds calculate NAV in a manner consistent with the measurement principles of FASB Topic 946, Financial Services – Investment Companies , as of the valuation date.

Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of September 30, 2021 investments in private funds consist of our investment in Monomoy Properties, an industrial real estate-focused fund, and Sharp Alpha Fund I, LP ( Sharp Alpha ), a closed-end limited partnership focused on gaming technologies.

Monomoy Properties allows redemptions annually with 90 days’ notice subject to a one-year lockup from the date of initial investment.

Sharp Alpha does not allow for redemptions.

Distributions will be received as the underlying assets are liquidated over the life of the fund, which is expected to be approximately 10 years.

The Company had unfunded commitments of $ 0.3 million as of September 30, 2021.

Contingent consideration

In conjunction with the acquisition of AMPM on March 1, 2021, the Company entered into a 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 key assumptions in applying the Monte Carlo simulation model as of the acquisition date include volatility of 40.0 % and a discount rate of 10.3 %.

The key assumptions in applying the Monte Carlo simulation model as of September 30, 2021 include volatility of 23.3 % and a discount rate of 10.3 %.

In conjunction with the acquisition of MedOne on August 31, 2021, the Company entered into a separate contingent consideration agreement that requires the Company to pay up to $ 1.0 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022 and September 1, 2023.

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 the acquisition date include revenue forecasts, volatility of 23.3 % and a discount rate of 10.3 %.

The contingent consideration is included within the other liabilities in the consolidated balance sheets.

Participation feature of HC LLC Series A-2 Preferred Stock

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.

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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.

As of period end, the 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 September 30, 2021 include financial forecasts of the durable medical equipment business, a discount rate of 14.5 % and a volatility rate of 49.9 % (level 3 inputs in accordance with the GAAP fair value hierarchy).

The key assumptions in applying the valuation approach as of June 30, 2021 include financial forecasts of the durable medical equipment business, a discount rate of 14.5 % and a volatility rate of 50.4 %.

The fair value of the embedded derivative as of September 30, 2021 and June 30, 2021, was $ 5.3 million and $ 5.8 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).

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 Company’s fixed assets consist of its 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

September 30, 2021

June 30, 2021

Real Estate Assets

Land and site improvements

Tenant improvements

Accumulated depreciation

Net carrying amount

Property and Equipment

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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,

For the three months ended September 30,

(in thousands)

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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 durable medical equipment and investment management segments include identifiable intangible assets acquired through acquisitions in prior years.

Goodwill presented on the consolidated balance sheets consists only of the goodwill acquired as part of the acquisitions of the durable medical equipment businesses.

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.

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

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

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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 September 30, 2021

As of June 30, 2021

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Assembled workforce

In-place lease

Aggregate Amortization Expense (in thousands)

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

Estimated Future Amortization Expense (in thousands) :

For the three months ending June 30, 2021

For the nine months ending June 30, 2022

For the year ending June 30, 2023

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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.

Through its majority-owned subsidiary HC LLC, and the subsidiaries of HC LLC, 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.

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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)

Revenues from base rents

Revenues from additional rental payments

Total rental revenues

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

For the year ending June 30, 2022

For the year ending June 30, 2023

For the year ending June 30, 2024

For the year ending June 30, 2025

Total base rent

Lessee Operating Leases

4 unchanged sentences

(in thousands)

March 31, 2021

September 30, 2021

June 30, 2021

17 unchanged sentences

Weighted-average discount rate

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.

As of September 30, 2021, the Company had remaining right of use assets of $ 5.2 million and lease liabilities of $ 5.5 million (consisting of $ 2.2 million in current portion of lease liabilities and $ 3.3 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.

1 unchanged sentence

Additional details are presented in the following table:

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

7 unchanged sentences

(in thousands)

For the three months ending June 30, 2021

For the nine months ending June 30, 2022

For the year ending June 30, 2023

20 unchanged sentences

On an annual basis, the lease payments increase at an average rate of approximately 2.4 % from $ 28 to $ 32 thousand per month.

Related party borrowings of the Company’s subsidiaries are summarized in the following table:

(in thousands)

March 31, 2021

June 30, 2020

Corbel Facility

and subsidiaries

Total principal

Unamortized debt issuance cost

Total long-term related party notes payable

Less current portion of related party notes payable

Related party notes payable, net of current portion

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

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

(in thousands)

March 31, 2021

September 30, 2021

June 30, 2021

and subsidiaries

Equipment Financing

and subsidiaries

Subordinated Note

Total principal

Unamortized debt premiums

Unamortized debt discounts and issuance costs

Total other outstanding borrowings

Less current portion of other outstanding borrowings

Other outstanding borrowings, net of current portion

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.

Less current portion of capitalized equipment financing

Equipment financing debt, net of current portion

The Company incurred interest expense of $ 0.01 million and $ 0.05 million for the three months ended September 30, 2021 and 2020, respectively.

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

1 unchanged sentence

Principal Due

For the three months ending June 30, 2021

For the year ending June 30, 2022

For the year ending June 30, 2023

For the year ending June 30, 2024

For the nine months ending June 30, 2022

For the year ending June 30, 2023

Outstanding principal on related party borrowings

Outstanding principal on other borrowings

Future interest to be paid-in-kind

Total future required principal payments

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 assumed in the acquisition of the durable medical equipment businesses in 2018 and was repaid on December 29, 2020.

The Corbel Facility was held by Corbel, a related party, which also holds a non-controlling interest in DME Inc.

2 unchanged sentences

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,

For the three months ended September 30,

(in thousands)

1 unchanged sentence

Interest expense

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.

The Company also assumed a revolving line of credit with Pacific Mercantile Bank ( DME Revolver ) in the acquisition of the durable medical equipment businesses in 2018.

There were no borrowings outstanding under the DME Revolver at September 30, 2021.

DME Revolver 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 %.

At September 30, 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.

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.

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.

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

The DME Revolver includes covenants that restrict HC LLC ’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 HC LLC .

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 HC LLC .

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.

HC LLC’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.

During the three months ended September 30, 2021 and 2020, the Company financed $ 2.1 million and $ 0.4 million, respectively, in inventory and equipment through such financing agreements.

Investment Management

As part of the entry into the investment management business, the Company acquired certain assets from MAST Capital and in consideration for those assets, GP Corp.

issued a senior secured note payable (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.

Note as well as non-controlling interests in GP Corp.

and certain board appointment rights from MAST Capital.

5 unchanged sentences

Note are summarized in the following table:

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

1 unchanged sentence

Interest expense

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.

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.

(1) Principal and interest amounts incurred after GEG’s purchase of the GP Corp.

note are not reported in this table, as they eliminate in consolidation.

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.

As of September 30, 2021 the total principal balance of Convertible Notes outstanding was $ 34.3 million including cumulative interest paid-in-kind.

The convertible notes ( Convertible Notes ) are held by a consortium of investors, including $ 16.2 million issued to certain related parties.

Such Convertible Notes issued to related parties include:

$ 6.4 million issued to entities associated with Matthew A.

Drapkin, including funds managed by Northern Right Capital Management, L.P, a significant shareholder.

Drapkin, a member of the Company’s board of directors, is the Chief Executive Officer of Northern Right Capital Management, L.P.

Drapkin, including funds managed by Northern Right Capital Management, L.P.

( Northern Right ), a significant shareholder.

Drapkin, a member of the Company’s Board of Directors, is the Chief Executive Officer of Northern Right.

$ 6.8 million issued to entities associated with Jason W.

Reese, including funds managed by ICAM, a significant shareholder.

Reese, the Executive Chairman of the Company’s board of directors, is the Chief Executive Officer of ICAM.

Reese is the executive chairman of the Company’s Board of Directors.

$ 0.7 million issued to entities associated with Eric J.

5 unchanged sentences

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.

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 .

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 ).

The Company incurred $ 1.2 million in issuance costs on the original issuance.

The 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.

The Company incurred interest expense of $ 0.5 million and $ 0.4 million related to the convertible notes for the three months ended September 30, 2021 and 2020, respectively, inclusive of non-cash interest related to amortization of discount.

On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded certain benefits made available under the enhanced Coronavirus Aid, Relief, and Economic Security 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.

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 December 31, 2021.

In addition to claiming ERC’s during the prior fiscal year, the Company claimed ERCs of $ 2.4 million during the quarter ended September 30, 2021.

Such claimed ERCs not settled prior to quarter end in the amount of $ 4.0 million are expected to be settled shortly thereafter and are disclosed within prepaid and other current assets on our consolidated balance sheet.

We will continue to monitor our eligibility for this credit during the quarter ending December 31, 2021.

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 .

Holders of non-controlling interests in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity or permanent equity .

The following table summarizes the non-controlling interests of subsidiary balances on the condensed consolidated balance sheets:

(in thousands)

March 31, 2021

September 30, 2021

June 30, 2021

3 unchanged sentences

Permanent equity

GE FM Holdings

Permanent equity

Consolidated Funds

Permanent equity

2 unchanged sentences

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,

For the three months ended September 30,

(in thousands)

2 unchanged sentences

Total DME Inc.

Temporary equity

Permanent equity

GE FM Holdings

Total DME Inc.

Permanent equity

Consolidated Funds

Permanent equity

Non-controlling interest in DME Inc.

classified as temporary equity

Permanent equity

HC LLC and DME Inc.-Non-Controlling interest 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.

11 unchanged sentences

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.

As a result of the reorganization discussed in Note 6- Related Party Transactions the non-controlling interests in DME Inc.

became non-controlling interests in HC LLC on May 31, 2021.

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

HC LLC and DME Inc.-Non-controlling interest 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.

1 unchanged sentence

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.

As a result of the reorganization discussed in Note 6- Related Party Transactions the non-controlling interests in DME Inc.

became non-controlling interests in HC LLC on May 31, 2021.

– 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.

During the year ended June 30, 2021, the Company repurchased 18.1 % of such interests, leaving a 1.8 % non-controlling interest in GP Corp.

as of June 30, 2021.

The Company’s 98.2 % interest in GP Corp.

was then exchanged for a direct interest in GP Corp.’s wholly-owned subsidiary, GEC GP.

Following the consummation of the reorganization on June 29, 2021, the Company no longer has an interest in GP Corp.

GEC GP – Non-controlling interest classified as permanent equity

As described above, on June 29, 2021, the Company exchanged its 98.2% interest in GP Corp.

for an identical 98.2% direct interest in GP Corp.’s wholly-owned subsidiary, GEC GP.

GEC GP owns the rights to the Profit Sharing Agreement with GECM as well as an intercompany obligation under the GP Corp.

The holder of the non-controlling interest is an employee of GECM and is entitled to participated in the cumulative earnings generated by the IMA.

Forest – Non-controlling interest classified as permanent equity

5 unchanged sentences

See Note 6 – Related Party Transactions.

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.

Consolidated Funds – Non-controlling interest classified as permanent equity

As of September 30, 2021, the Company held 68.9 % of the capital in the Consolidated Funds.

The remaining capital in the Consolidated Funds is recorded as a non-controlling interest.

These non-controlling interests include affiliated individuals and entities.

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 FM Holdings.

The real estate business was sold in June 2021.

See Note 4 – Discontinued Operations.

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

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

Balance, as of June 30, 2021

Issuance of Preferred Stock

Redemption of Preferred Stock

Balance, as of September 30, 2021

Series A-1 Preferred Stock

1 unchanged sentence

Forest Preferred Stock

Total preferred stock classified as liability

There was no preferred stock activity during the three months ended September 30, 2021.

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

51 unchanged sentences

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.

Restricted Stock Awards and Restricted Stock Units

During the three months ended September 30, 2021, there were no awards or forfeitures of performance-based restricted stock awards included in the below table and 732,909 remain outstanding as of September 30, 2021.

These 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.

As of September 30, 2021, the Company estimated that approximately 249,802 of the restricted stock awards are probable of vesting under the performance condition.

Subsequent to quarter end, the Compensation Committee of the Board of Directors in its discretion has determined that an aggregate of 580,923 performance shares previously awarded to certain employees have vested.

In addition, during the three months ended September 30, 2021, the Company granted 104,602 service-based restricted stock awards to a director, which vest 25 % up-front and annually on a pro-rata basis over the next 3 years subject to service requirements.

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:

During the three months ended September 30, 2021 the Company granted 7,845 and 140,294 shares of restricted stock units to employees and directors, respectively.

The activity of the Company’s restricted stock awards and units for the three months ended September 30, 2021 was as follows:

Restricted Stock Awards and Restricted Stock Units

3 unchanged sentences

Outstanding at June 30, 2021

Outstanding at March 31, 2021

Outstanding at September 30, 2021

Stock Options

The following table summarizes the Company’s option award activity as of and through March 31, 2021:

The following table summarizes the Company’s option award activity as of and through September 30, 2021:

(in thousands)

6 unchanged sentences

Forfeited, cancelled or expired

Outstanding at March 31, 2021

Exercisable at March 31, 2021

Vested and expected to vest as of March 31, 2021

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.

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.

Outstanding at September 30, 2021

Exercisable at September 30, 2021

Vested and expected to vest as of September 30, 2021

During the three months ended September 30, 2021 and 2020, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $ 0.6 million and $ 0.4 million, respectively.

As of September 30, 2021, the Company had unrecognized compensation costs related to all unvested share awards and options totaling $ 1.5 million.

During the three months ended September 30, 2021, the Company issued compensation to certain employees in the form of GECC common shares.

The total value of issued shares were $ 0.8 million, of which $ 0.2 million vested immediately, and the balance will vest annually pro-rata for the subsequent 3 years.

As of June 30, 2021, the Company had net operating loss ( NOL ) carryforwards for federal and state income tax purposes of approximately $ 952 million and $ 198 million, respectively.

The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2022 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.

The California NOL carryforwards of $ 185 million will expire from 2029 through 2037 .

The Massachusetts NOL carryforwards of $ 13 million will expire from 2031 to 2038 .

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.

4 unchanged sentences

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.

The Company allocates resources based on two business operating segments:

durable medical equipment and investment management, 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

General Corporate

Intercompany Eliminations (1)

Consolidated Total

Total revenue

Operating costs and expenses:

Cost of durable medical equipment sold and services

Cost of durable medical equipment rentals

Depreciation and amortization

Stock-based compensation (2)

Transaction costs (3)

Other selling, general and administrative

Total operating expenses

Other income (expense):

Interest expense

Other income (expense)

Total other expense, net

Total pre-tax income (loss)

For the three months ended March 31, 2020

(in thousands)

Durable Medical Equipment

Investment Management

General Corporate

Intercompany Eliminations (1)

Consolidated Total

Total revenue

Operating costs and expenses:

Cost of durable medical equipment sold and services

Cost of durable medical equipment rentals

Depreciation and amortization

Stock-based compensation (2)

Transaction costs (3)

Other general and administrative

Total operating expenses

Other income (expense):

Interest expense

Other income (expense)

Total other expense, net

Total pre-tax income (loss)

For the nine months ended March 31, 2021

For the three months ended September 30, 2021

(in thousands)

9 unchanged sentences

Depreciation and amortization

Stock-based compensation (2)

Non-cash compensation (3)

Transaction costs (4)

6 unchanged sentences

Total pre-tax income (loss)

For the nine months ended March 31, 2020

For the three months ended September 30, 2020

(in thousands)

9 unchanged sentences

Depreciation and amortization

Stock-based compensation (2)

Non-cash compensation (3)

Transaction costs (4)

6 unchanged sentences

Total pre-tax income (loss)

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.

Previously reported non-operating activity including dividend income and unrealized gains/losses related to managed investments has been reclassified from General Corporate to Investment Management to conform with current segment organization.

The Company’s wholly-owned subsidiary, DME Manager, provides advisory services to HC LLC (formerly to DME, Inc.).

and receives consulting fees from for those services.

DME Manager is part of general corporate operations while HC LLC.

is part of the durable medical equipment segment.

The corresponding expense to DME Inc.

The corresponding expense to HC LLC.

and revenue to DME Manager are eliminated in consolidation.

4 unchanged sentences

The corresponding interest expense to HC LLC and interest income to Forest are eliminated in consolidation.

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.

Non-cash compensation includes stock-based compensation and compensation in the form of stock in portfolio companies held by the Company.

Non-cash compensation attributable to the investment management segment is included in investment management expenses in the condensed consolidated statements of operations.

Non-cash compensation attributable to the general corporate segment is included in selling, general and administrative expense in the condensed consolidated statements of operations.

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.

The following tables illustrate assets by segment:

As of March 31, 2021

As of September 30, 2021

(in thousands)

12 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements