What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-05-14 · 113 added, 166 removed, 176 unchanged (61% of the section changed)

1 unchanged sentence

We are a holding company seeking to acquire assets and businesses, where our people and other assets provide a competitive advantage.

We currently have three business operating segments:

durable medical equipment, investment management and real estate, with general corporate representing unallocated costs and activity to arrive at consolidated operations.

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

We currently have two business operating segments:

durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations.

Our durable medical equipment business specializes in the distribution of respiratory care equipment, including positive air pressure equipment and supplies, ventilators and oxygen equipment, and provides sleep study services.

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

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

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

Our real estate business, which we launched in March 2018, has a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property ).

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

The combined assets under management of these entities at September 30, 2021 was approximately $291.9 million.

The operations of our general corporate segment encompass our corporate headquarters operations, in addition to management consulting services provided to certain of our subsidiaries.

We continue to explore other opportunities in the durable medical equipment, investment management and real estate sectors, as well as opportunities in other areas that we believe provide attractive risk-adjusted returns on invested capital.

We continue to explore other opportunities in the durable medical equipment and investment management sectors, as well as opportunities in other areas that we believe provide attractive risk-adjusted returns on invested capital.

As of the date of this report, we have not entered into any binding commitments to make additional acquisitions or investments in any of these areas.

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

As of June 30, 2021, we had $952 million of net operating loss ( NOL ) carryforwards for federal income tax purposes.

Discontinued Operations

We launched our real estate business in March 2018 with an investment 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.

In June 2021, we sold the real estate business.

Previously reported 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.

Holding Company Reorganization

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

(the Company ) completed a reorganization of the Company’s corporate structure (the Holding Company Reorganization ), where Great Elm Capital Group, Inc.

(the Company or GEG ) completed a reorganization of the Company’s corporate structure (the Holding Company Reorganization ), where Great Elm Capital Group, Inc.

( GEC ) changed its name to Forest Investments, Inc.

( Forest ) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc.

(the Company ).

( Forest ) and became a wholly owned subsidiary of a new holding company, the Company.

Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG.” Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Exchange Act.

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Great Elm Healthcare, LLC ( HC LLC ) issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock ) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to Great Elm DME, Inc.

) , which in turn distributed such preferred stock pro rata to the holders of its common stock such that 80.1 % of such preferred stock is held by Forest, 9.95 % is held by Corbel Capital Partners SBIC, L.P.

( 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 ).

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

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

The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC ( 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 ).

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

During the three and nine months ended March 31, 2021, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic.

During the three months ended September 30, 2021, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic.

In particular, the investment management business continues to experience reduced assets under management in our managed portfolios as compared to pre-pandemic levels.

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In addition, the durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups.

In addition, indirectly attributable to the COVID-19 pandemic the durable medical equipment industry has been impacted by global supply chain challenges most notably shortages in semiconductor microchips.

These shortages have impacted our ability to purchase positive air pressure ( PAP ) devices during the most recent quarter in accordance with our normal procurement process.

Although we were able to meet patient demand for such devices during the quarter, our on-hand inventory of PAP devices decreased during the quarter.

The impact of COVID-19 continues to evolve and its duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time.

However, the Company expects to continue to experience decreased durable medical equipment rental revenues in the near future due to the reduction in new patient set-ups during the pandemic.

However, the Company expects to continue to experience decreased durable medical equipment rental revenues in the near future due to the reduction in new patient set-ups during the pandemic and due to the supply chain issues noted above.

Should the disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business and operations.

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These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future.

During the nine months ended March 31, 2021, we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 as it relates to recurring transactions.

During the three months ended September 30, 2021, we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 as it relates to recurring transactions, except as follows:

On July 1, 2021 the Company adopted the Financial Accounting Standards Board’s Accounting Standard Update 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 the full retrospective method of adoption, previously reported financial information has been recast to reflect the adoption of this accounting standard in those periods.

Results of Operations

The following discussion reflects the historical performance of our three business operating segments and general corporate.

We expect that our results of operations in future periods will be adversely impacted by the COVID-19 outbreak and its negative effects on the global economic conditions.

The following discussion reflects the historical performance of our two business operating segments and general corporate.

The following table provides the results of our consolidated operations:

For the three months ended March 31,

For the nine months ended March 31,

Percent Change

For the three months ended September 30,

Percent Change

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Total pre-tax income (loss)

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

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

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

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

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

Revenues for the three months ended September 30, 2021 increased $1.2 million as compared to the corresponding period in the prior year.

The increase is primarily attributable to a $1.0 million increase in durable medical equipment revenues.

The growth reflects revenue contributions from the acquisitions of Advanced Medical DME, LLC and PM Sleep Lab, LLC (collectively, AMPM ) in March 2021 and of MedOne Healthcare LLC ( MedOne ) in August 2021.

In addition, we noted organic growth in resupply sales within the durable medical equipment business, which was partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups.

Investment management revenues also increased $0.2 million related to increases in assets under management as compared to the prior period.

Operating costs and expenses

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

Operating costs for the three months ended September 30, 2021 decreased $1.0 million as compared to the corresponding period in the prior year.

The decrease is primarily related to $2.4 million in Employee Retention Credits claimed during the quarter under the enhanced Coronavirus Aid, Relief, and Economic Security Act ( CARES Act ).

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

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

Such benefit did not recur in the current period.

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

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

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

This decrease was partially offset by increases of $0.8 million in other durable medical equipment costs primarily related to the operations of AMPM and MedOne, and $0.8 million in investment management expenses primarily related to increased compensation.

Other income (expense)

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

Other income and expense for the three and nine months ended March 31, 2021 and 2020 primarily consisted of dividend income and net unrealized gains and losses on the Company’s investment in GECC which is discussed in more detail under “—General Corporate” below.

In addition, the Company recognized approximately $1.9 million in losses on extinguishment of debt during the three and nine months ended March 31, 2021.

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

Interest expense increased by $0.2 million for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to current period interest on the $37.0 million face value externally-held preferred stock in Forest and HC LLC which were issued in December 2020.

In conjunction with the issuance of this preferred stock, we extinguished the Corbel Facility which had $24.8 million in principal outstanding on September 30, 2020.

Other income and expense for the three months ended September 30, 2021 and 2020 primarily consisted of dividend income and net unrealized gains and losses on the Company’s investment in GECC and private funds which is discussed in more detail under “—Investment Management” below.

Durable Medical Equipment Business

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

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

Percent Change

Total revenue

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Durable Medical Equipment Revenue

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

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

For the nine months ended March 31, 2021, revenues from the sale of medical equipment and sleep study services were $23.7 million and $3.6 million respectively, while for the nine months ended March 31, 2020 such revenues were $21.5 million and $4.2 million, respectively.

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

For the three and nine months ended March 31, 2021, rental revenue was $4.5 million and $14.9 million, respectively, as compared to $5.2 million and $16.0 million, respectively, for the three and nine months ended March 31, 2020.

For the three months ended September 30, 2021, revenues from the sale of medical equipment and sleep study services were $8.7 million and $1.3 million, respectively, while for the three months ended September 30, 2020, such revenues were $8.0 million and $1.2 million, respectively.

The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021 as well as organic growth in resupply sales.

For the three months ended September 30, 2021, rental revenue was $5.5 million as compared to $5.4 million for the three months ended September 30, 2020.

This decrease is due primarily to reduced referral pipelines for new equipment set-ups during the ongoing COVID-19 pandemic, which are customarily driven by in-house or external sleep studies.

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

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

The contributions of AMPM and MedOne were mostly offset by overall decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups.

Durable Medical Equipment Operating Costs and Expenses

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

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

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

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

Our margins were also impacted by the revenue mix within the durable medical equipment business.

We incurred lower margins on sales and services as high margin sleep lab testing decreased as a percentage of revenue and was replaced with lower margin equipment and supplies sales.

The Company realized higher margins on rentals due to lower capital expenditures for new set-ups.

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

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

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

The durable medical equipment business has also experienced increased operating expenses related to paid employee absences due to COVID-19 illnesses and exposures, costs related to cleaning and disinfecting workspaces, and additional shipping costs for remote set-ups.

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

The increase in freight and postage costs was primarily attributable to the additional costs of remote patient set-ups which were performed in person prior to the COVID-19 pandemic.

The favorable margins as compared to the prior period are primarily due to favorable negotiated volume pricing with strategic vendors.

General and administrative expenses consist of employee-related, facility-related, freight and shipping, information technology and other costs.

For the three months ended September 30, 2021, these amounts are net of government stimulus received under the CARES Act of $2.3 million related to employee retention tax credits.

Excluding such stimulus, employee-related costs were $6.

1 million and $5.2 million for the three months ended September 30, 2021 and 2020, respectively.

The increase in employee related costs is primarily due to additional payroll-related costs relating to acquired AMPM and MedOne employees.

Facility-related expenses of $0.8 million and freight and shipping costs of $0.4 million remained consistent in the comparative periods.

Information technology costs were $0.6 million and $0.5 million, respectively, with increases due to the AMPM and MedOne acquisitions.

Other costs were $0.7 million and $0.9 million, respectively, primarily consisting of professional fees.

Other costs were benefited in the current period by $0.2 million related to change in fair value of contingent consideration.

Transaction costs increased for the three months ended September 30, 2021 of $0.1 million primarily relate to one-time expenses incurred in the acquisition of MedOne, whereas no acquisitions were noted in the prior period.

Depreciation and amortization includes the depreciation of fixed assets, excluding depreciation on the equipment held for rental, which is included in the cost of rentals, and amortization of the intangible assets resulting from the acquisition of the durable medical equipment businesses.

Depreciation and amortization for the three and nine months ended March 31, 2021 decreased as compared to comparable periods in the prior year due to decreased capital expenditures during the COVID-19 pandemic.

Depreciation and amortization for the three months ended September 30, 2021 and 2020 remained consistent at $0.5 million.

Durable Medical Equipment Other Expenses

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

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

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

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

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

The increase in interest expense for the three months ended September 30, 2021 as compared to the corresponding period in the prior year is attributable primarily to higher outstanding principal balances of the HC LLC preferred stock of $44.1 million as compared to $25.3 million outstanding under the Corbel Facility and DME Revolver (as defined below) as of September 30, 2020.

During the three months ended September 30, 2021, the Company recognized a $0.5 million benefit within the durable medical equipment business related to the recurring fair value adjustment of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest.

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

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

Investment Management Business

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

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

Percent Change

Total revenue

Operating costs and expenses:

Stock-based compensation

Consulting agreement

Non-cash compensation

Transaction Costs

Other general and administrative

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Investment management revenues include management fees and administrative fees.

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

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

The decrease in management fees for the three and nine months ended March 31, 2021 as compared to the three and nine months ended March 31, 2020 is primarily attributable to decreases in the average assets on which such fees are calculated as a result of the impact of COVID-19 on the portfolio managed.

For the three months ended September 30, 2021 and 2020, management fees were $0.9 million and $0.6 million, respectively, and administrative fees were $0.1 million and $0.2 million, respectively.

The increase in management fees for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 is attributable to increases in the average assets on which such fees are calculated through growth of GECC and GESOF.

Investment Management Costs and Expenses

Great Elm Capital Management, Inc.

had a consulting agreement with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees.

The consulting agreement expired in November 2019 and as such, there were no corresponding fees incurred for the three and nine months ended March 31, 2021.

Stock-based compensation was impacted by a non-recurring benefit in connection with updated estimates related to performance-based awards of $0.5 million and $0.7 million for the three and nine months ended March 31, 2020.

Non-cash compensation compensation was impacted by annual awards granted in September 2021, whereas no awards were granted to the investment team in the prior year.

Other general and administrative costs consist primarily of professional fees, facilities and other overhead costs, and payroll and related costs, excluding stock-based compensation.

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

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

Real Estate Business

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

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

For the three months ended March 31,

For the nine months ended March 31,

(in thousands)

Percent Change

Total revenue

Operating costs and expenses:

General and administrative

Depreciation and amortization

Total operating expenses

Other income (expense):

Interest expense

Other income (expense)

Total other expense, net

Operating income (loss):

Total pre-tax income (loss)

Real Estate Revenue

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

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

Real Estate Costs and Expenses

The real estate business’ costs primarily consist of management fees, insurance and state sales tax, depreciation of real estate assets and the amortization of the in-place lease intangible assets.

Our costs and expenses have generally remained consistent year over year.

The increase in general and administrative costs for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, is primarily attributable to an increase in allocated payroll costs and consulting fees.

Investment Management Other Income (Expense)

Other income and expense primarily consisted of dividend income and net realized and unrealized losses on the Company’s investment in GECC and the net realized and unrealized losses of consolidated funds.

Dividend income from GECC for the three months ended September 30, 2021 and 2020 was $0.6 million and $0.5 million, respectively.

We recognized net realized and unrealized losses on our investment in GECC and the investments of the consolidated funds of $0.3 million for the three months ended September 30, 2021 as compared to net unrealized loss of $1.9 million on our investment in GECC for the three months ended September 30, 2020.

We mark-to-market our investment in GECC and underlying investments of consolidated funds by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end.

Interest expense for the three months ended September 30, 2021 remained consistent with the three months ended September 30, 2020

General Corporate

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

For the three months ended March 31,

For the nine months ended March 31,

For the three months ended September 30,

(in thousands)

Percent Change

Total revenue

Operating costs and expenses:

Stock-based compensation

Non-cash compensation

Transaction costs

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General Corporate Revenue

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

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

For the three months ended September 30, 2020, all revenue was derived from fees earned by DME Manager, which provides consulting services to DME Inc.

In addition to this revenue, the three months ended September 30, 2021, revenue includes $0.1 million in fees earned by DME Manager relating to consulting services provided to Forest.

General Corporate Costs and Expenses

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Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities.

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

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

The decrease in other general and administrative costs for the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020 is primarily attributable to the impact of director stock-based compensation discussed above as well as lower audit-related professional fees due to the change in auditors in the prior fiscal year, as well as the Company becoming a non-accelerated filer with reduced reporting requirements under the updated rules of the SEC.

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

Non-cash compensation, increased $0.1 million for the three months ended September 30, 2021 as compared to the corresponding period in the prior year.

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

The decrease in other general and administrative costs for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 is primarily attributable to the impact of director stock-based compensation discussed above.

Other Income (Expense)

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

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

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

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

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

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

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

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

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

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

Interest expense for the three months ended September 30, 2021 consists primarily of interest on the convertible notes, as well as on Forest Preferred Stock, which was issued in December 2020.

The corresponding periods in the prior year does not include interest on the Forest Preferred Stock, as it was not outstanding in the prior period.

Other income (expense) during the current year is comprised of intercompany interest income of $ 1.2 million related to Forest's investments in HC LLC preferred stock , and $0.2 million in dividends and unrealized gains on our investment in Monomoy Properties, LLC .

This amount is partially offset by a $0.5 million charge related to changes in the valuation of the embedded derivative.

This income has corresponding charges in the durable medical equipment business and such impacts are eliminated in consolidation.

Since the preferred stock was issued in December 2020, there is no corresponding activity in the prior year.

As of June 30, 2021, the Company had 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 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.

The state NOL carryforwards will expire from 2029 through 2038.

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Liquidity and Capital Resources

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

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

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

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

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

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

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

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

The net cash outflow primarily consisted of $8.8 million in purchases of investments related to participation in the GECC non-transferable rights offering in October 2020 and $4.6 million in purchases of equipment to be held for rental.

C ash flows used in investing activities for the nine months ended March 31, 2020 were $4.5 million.

The net cash outflow primarily consisted of $3.5 million in purchases of equipment for rental partially offset by proceeds from sale of equipment held for rental and disposal of property and equipment.

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

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

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

Cash flows used in operating activities for the three months ended September 30, 2021 were $1.0 million.

The net cash outflow was primarily the result of our net loss of $0.1 million, along with a decrease in prepaid assets of $1.4 million, an increase of deferred revenues of $1.2 million due to the ERC during the period, $0.7 million in net purchases of investments within our consolidated funds and $0.6 million due to the timing of cash payments and receipts within our receivables and payables.

These outflows were partially offset by non-cash inflows of $2.2 million related to depreciation and amortization and $0.6 million in stock-based compensation.

Cash flows provided by operating activities for the three months ended September 30, 2020 were $1.2 million.

The net cash inflow in our continuing operations was primarily the result of our net loss from continuing operations of $3.8 million offset by non-cash charges of $2.8 million, along with unrealized loss on investments of $1.9 million.

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

Cash flows used in investing activities for the three months ended September 30, 2021 were $3.2 million.

The net cash outflow primarily consisted of $1.3 million due to acquisition of MedOne, along with $2.5 million of purchases of capital equipment, partially offset by $0.6 million in proceeds from sales of equipment held for rental and disposal of property and equipment

Cash flows used in investing activities for the three months ended September 30, 2020 were $15.0 million.

The net cash outflow primarily consisted of $13.6 million due to the participation of the Rights Offering of GECC.

Additionally, there was $1.6 million in purchases of equipment for rental partially offset by $0.2 million in proceeds from sale of equipment held for rental and disposal of property and equipment.

Cash flows provided by financing activities for the three months ended September 30, 2021 were $1.6 million which primarily consisted of proceeds from equipment financing of $2.1 million and capital contributions to our consolidated funds of $0.5 million, partially offset by principle payments of the equipment financing totaling $1.2 million.

Cash flows provided by financing activities for the three months ended September 30, 2020 were $4.3 million which consisted of net principal payments on durable medical equipment debt of $4.3 million.

Financial Condition

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

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

As of September 30, 2021, we had an unrestricted cash balance of $21.8 million.

We also hold 5,484,669 shares of GECC common stock with an estimated fair value of $19.1 million as of September 30, 2021.

We intend to make acquisitions or investments that we believe will result in the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness.

If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.

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

As of September 30, 2021, the Company had $34.3 million face value in convertible notes outstanding.

The convertible notes are held by a consortium of investors, including related parties.

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Upon conversion of any note, the Company will pay or deliver, as the case may be, to the noteholder, in respect of each $1,000 principal amount of notes being converted, shares of common stock equal to the conversion rate in effect on the conversion date, together with cash, if applicable, in lieu of delivering any fractional share of common stock.

As of March 31, 2021, JPM held $35.0 million face value in shares of Forest Preferred Stock.

As of September 30, 2021, JPM held $35.0 million face value in shares of Forest Preferred Stock.

The shares provide for a 9% annual dividend, which is payable quarterly.

The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027.

The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than $300 million.

The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest’s net operating loss carryforwards to less than $300 million.

The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place.

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The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.

As of March 31, 202 1 , Corbel and VHG, both related parties, held a combined $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock.

As of September 30, 2021, Corbel and VHG, both related parties, held a combined $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock.

The shares provide for a 9% annual dividend, which is payable quarterly.

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must also comply with a leverage ratio and levered free cash flow ratio, which are based in part on the HC LLC EBITDA levels.

The Company has a credit facility with Pacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (at March 31, 2021, the effective rate was 3.7%) through maturity on November 29, 2022 (the DME Revolver ).

The Company has a credit facility with Pacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (at September 30, 2021, the effective rate was 3.7%) through maturity on November 29, 2022 (the DME Revolver ).

The DME Revolver allows for borrowings up to $10 million.

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The DME Revolver is secured by all of the assets of the durable medical equipment business and the Company is required to meet certain financial covenants.

The DME Revolver was not drawn as of March 31, 2021.

The DME Revolver includes covenants that restrict DME Inc.

The DME Revolver was not drawn as of September 30, 2021.

The DME Revolver include s covenants that restrict HC LLC .

business operations to its current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions.

Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of DME Inc.

must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the DME Inc.

EBITDA levels.

As of March 31, 2021, the Company had a senior note due to Wells Fargo Bank Northwest, National as trustee totaling $48.3 million that accrues interest at a rate of 3.49% through maturity on March 15, 2030 (the Senior Note ).

The Senior Note requires monthly principal and interest payments through the maturity date.

The Senior Note is secured by a first lien mortgage on the Property and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations.

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

Treasury security over the remaining average life of the Senior Note.

As of March 31, 2021, the Company had a subordinated note due to Wells Fargo Bank Northwest, National as trustee totaling $4.3 million that accrues interest at a rate of 15.0% through maturity on March 15, 2030 (the Subordinated Note ).

The Subordinated Note is a capital appreciation note, whereby the monthly interest is capitalized to the principal balance and due at maturity.

The Subordinated Note is secured by a second lien mortgage on the Property, and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations.

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

Treasury security over the remaining average life of the Subordinated Note.

The note agreements for both the Senior Note and the Subordinated Note include negative covenants that restrict the Company’s majority-owned subsidiary, CRIC IT Fort Myers LLC’s (the Property Owner ), business operations to ownership and lease of the Property, limit additional indebtedness, require maintenance of insurance and other customary requirements related to the Property.

Events of default include non-payment of amounts when due, inability to pay indebtedness or material change in the business operations or financial condition of the Property Owner or the lease tenant that in the lender’s reasonable determination would reasonably be expected to materially impair the value of the Property, prevent timely repayment of the notes or performance of any material obligations under the notes and related agreements.

The payments under the notes are also guaranteed on a full and several basis by the non-controlling interest holder of the Property Owner.

Both the Senior Note and Subordinated Note are non-recourse to the Company, but are secured by the Property, the rights associated with the leases and the stock owned by the Company in the Property Owner.

Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of HC LLC .

HC LLC must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the HC LLC EBITDA levels.

The Company was in compliance with all material covenants and restrictions at September 30, 2021

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%.

As of September 30, 2021, the Company had $3.0 million in equipment financing debt outstanding.

Off-Balance Sheet Arrangements

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

As of September 30, 2021, we did not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis