Great Elm Group, Inc. 10-Q

Item 1. Financial Statements. Great Elm Group, Inc. Condensed Consolidated Balance Sheets (Unaudited) Dollar amounts in thousands (except per share data) ASSETS September 30, 2021 June 30, 2021 Current assets: Cash and cash equivalents $ 21,791 $ 24,382 Accounts receivable 5,544 6,518 Related party receivables 1,895 1,665 Investments, at fair value (cost $ 44,647 and $ 45,326 , respectively) 24,008 24,044 Inventories 1,071 1,066 Prepaid and other current assets 5,169 3,791 Assets of consolidated funds Investments, at fair value (cost $ 26,955 and $ 26,814 , respectively) 26,541 26,490 Prepaid expenses and other assets 574 578 Total current assets 86,593 88,534 Property and equipment, net 885 981 Equipment held for rental, net 7,230 7,391 Identifiable intangible assets, net 8,509 8,928 Goodwill 52,463 50,536 Right of use assets 5,184 5,241 Other assets 256 258 Total assets $ 161,120 $ 161,869 LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,108 $ 5,521 Accrued expenses and other liabilities 5,534 6,955 Deferred revenue 3,279 4,438 Current portion of lease liabilities 2,171 1,920 Current portion of capitalized equipment financing 2,927 1,974 Liabilities of consolidated funds- accrued expenses and other 11,940 12,197 Total current liabilities 30,959 33,005 Lease liabilities, net of current portion 3,281 3,596 Convertible notes (face value $ 34,346 , including $ 16,231 held by related parties) 33,362 33,333 Equipment financing debt, net of current portion 42 67 Redeemable preferred stock of subsidiaries (held by related parties, face value $ 37,018 ) 35,584 35,529 Other liabilities 1,254 915 Total liabilities 104,482 106,445 Commitments and Contingencies (Note 20) Contingently redeemable non-controlling interest 2,844 2,639 Stockholders' equity Preferred stock, $ 0.001 par value; 5,000,000 authorized and zero outstanding - - Common stock, $ 0.001 par value; 350,000,000 shares authorized and 26,692,033 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 26 26 Additional paid-in-capital 3,308,194 3,307,613 Accumulated deficit ( 3,264,603 ) ( 3,264,403 ) Total Great Elm Group, Inc. stockholders' equity 43,617 43,236 Non-controlling interests 10,177 9,549 Total stockholders' equity 53,794 52,785 Total liabilities, non-controlling interest and stockholders' equity $ 161,120 $ 161,869 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Great Elm Group, Inc. Condensed Consolidated Statements of Operations (Unaudited) Dollar amounts in thousands (except per share data) For the three months ended September 30, 2021 2020 Revenues: Durable medical equipment sales and services revenue $ 10,076 $ 9,213 Durable medical equipment rental income 5,479 5,397 Investment management revenues 983 773 Total revenues 16,538 15,383 Operating costs and expenses: Cost of durable medical equipment sold and services 4,060 4,207 Cost of durable medical equipment rentals (1) 1,850 1,915 Durable medical equipment other operating expenses (2) 6,253 7,680 Investment management expenses 1,187 726 Depreciation and amortization 562 591 Selling, general and administrative (3) 1,573 1,413 Expenses of consolidated funds 52 - Total operating costs and expenses 15,537 16,532 Operating income (loss) 1,001 ( 1,149 ) Dividends and interest income 653 529 Net realized and unrealized loss on investment ( 14 ) ( 1,902 ) Net realized and unrealized loss on investments of consolidated funds ( 189 ) - Interest expense ( 1,362 ) ( 1,145 ) Other income, net 16 ( 2 ) Income (loss) from continuing operations, before income taxes 105 ( 3,669 ) Income tax benefit (expense) 1 ( 99 ) Income (loss) from continuing operations 106 ( 3,768 ) Discontinued operations: Income from discontinued operations, net of tax - 67 Net income (loss) $ 106 $ ( 3,701 ) Less: net income (loss) attributable to non-controlling interest, continuing operations 306 ( 120 ) Less: net income attributable to non-controlling interest, discontinued operations - 13 Net loss attributable to Great Elm Group, Inc. $ ( 200 ) $ ( 3,594 ) Basic and diluted income (loss) per share from: Continuing operations $ ( 0.01 ) $ ( 0.14 ) Discontinued operations - 0.00 Net loss $ ( 0.01 ) $ ( 0.14 ) Weighted average shares outstanding Basic 25,982 25,576 Diluted 25,982 25,576 (1) Includes depreciation expense of: 1,688 1,748 (2) Net of CARES Act Stimulus of: 2,321 - (3) Net of CARES Act Stimulus of: 84 - The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Great Elm Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited) Dollar and share amounts in thousands Dollar and share amounts in thousands Common Stock Additional Paid-in Accumulated Total Great Elm Group, Inc. Stockholders' Non- controlling Total Stockholders' Contingently Redeemable Non-controlling Shares Amount Capital Deficit Equity Interest Equity Interest BALANCE, June 30, 2021 25,948 $ 26 $ 3,307,613 $ ( 3,264,403 ) $ 43,236 $ 9,549 $ 52,785 $ 2,639 Net loss - - - ( 200 ) ( 200 ) 101 ( 99 ) 205 Issuance of interests in Consolidated Funds, net - - - - - 527 527 - Issuance of common stock related to vesting of restricted stock 145 0 - - - - - - Stock-based compensation - - 581 - 581 - 581 - BALANCE, September 30, 2021 26,093 $ 26 $ 3,308,194 $ ( 3,264,603 ) $ 43,617 $ 10,177 $ 53,794 $ 2,844 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Great Elm Group, Inc. Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited) Dollar and share amounts in thousands Common Stock Additional Paid-in Accumulated Total Great Elm Group, Inc. Stockholders' Non- controlling Total Stockholders' Contingently Redeemable Non-controlling Shares Amount Capital Deficit Equity Interest Equity Interest BALANCE, June 30, 2020 25,530 $ 26 $ 3,318,117 $ ( 3,257,127 ) $ 61,016 $ 3,886 $ 64,902 $ 3,890 Net loss - - - ( 3,594 ) ( 3,594 ) ( 61 ) ( 3,655 ) ( 46 ) Issuance of common stock related to vesting of restricted stock 116 0 - - - - - - Stock-based compensation - - 429 - 429 - 429 - BALANCE, September 30, 2020 25,646 $ 26 $ 3,318,546 $ ( 3,260,721 ) $ 57,851 $ 3,825 $ 61,676 $ 3,844 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Great Elm Group, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Dollar amounts in thousands For the three months ended September 30, 2021 2020 Cash flows from operating activities: Net income (loss) $ 106 $ ( 3,701 ) Net income from discontinued operations - ( 67 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 2,250 2,339 Stock-based compensation 581 429 Sales of investments by consolidated funds 2,620 - Purchases of investments by consolidated funds ( 3,276 ) - Stock dividends received from GECC - ( 438 ) Unrealized loss on investments from consolidated funds 90 - Realized loss on investments from consolidated funds 99 - Unrealized (gain) loss on investments ( 639 ) 1,902 Realized loss on investments 653 - Non-cash interest and amortization of debt issuance costs 90 54 Deferred tax expense (benefit) related to continuing operations ( 1 ) 92 Other non-cash expense, net 561 399 Gain on sale of equipment held for rental ( 43 ) ( 62 ) Change in fair value of contingent consideration ( 163 ) - Changes in operating assets and liabilities: Related party receivable ( 326 ) ( 65 ) Accounts receivable 974 220 Inventories ( 5 ) 343 Prepaid assets, deposits, and other assets ( 1,372 ) ( 381 ) Operating leases ( 568 ) ( 407 ) Deferred revenues ( 1,159 ) ( 374 ) Accounts payable, accrued liabilities and other liabilities ( 1,506 ) 875 Net cash provided by (used in) operating activities- continuing operations ( 1,034 ) 1,158 Net cash provided by (used in) operating activities-discontinued operations - 565 Net cash provided by (used in) operating activities ( 1,034 ) 1,723 Cash flows from investing activities: Acquisition of businesses, net of cash acquired ( 1,250 ) - Purchases of investments ( 165 ) ( 13,560 ) Sales of investments 187 - Purchases of equipment held for rental ( 2,501 ) ( 1,606 ) Proceeds from sale of equipment held for rental 606 251 Purchases of property and equipment ( 48 ) ( 44 ) Net cash used in investing activities- continuing operations ( 3,171 ) ( 14,959 ) Net cash used in investing activities- discontinued operations - - Net cash used in investing activities ( 3,171 ) ( 14,959 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Great Elm Group, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (continued) Dollar amounts in thousands For the three months ended September 30, 2021 2020 Cash flows from financing activities: Principal payments on revolving line of credit - ( 3,400 ) Principal payments on related party notes payable - ( 353 ) Principal payments on equipment financing debt ( 1,155 ) ( 1,058 ) Proceeds from equipment financing debt 2,083 558 Due to broker of consolidated funds 186 - Capital contributions from non-controlling interests in consolidated funds 500 - Net cash provided by financing activities- continuing operations 1,614 ( 4,253 ) Net cash provided by financing activities- discontinued operations - ( 565 ) Net cash provided by financing activities 1,614 ( 4,818 ) Net decrease in cash and cash equivalents ( 2,591 ) ( 18,054 ) Cash and cash equivalents at beginning of period 24,382 40,500 Cash and cash equivalents at end of period $ 21,791 $ 22,446 Cash paid for interest $ 831 $ 1,112 Non-cash investing and financing activities Lease liabilities and right of use assets arising from operating leases $ 504 $ - Contingent consideration 497 - The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Great Elm Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2021 1. Organization Great Elm Group, Inc. (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. ( 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. ( 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. 9 General Corporate On December 29, 2020, the Company completed a reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc. ( GEC ) changed its name to Forest Investments, Inc. ( Forest ) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG”. Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended. The 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. 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. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in the Company’s Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. The condensed consolidated balance sheet as of June 30, 2021, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2021. 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 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. 10 Principles of Consolidation The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries; majority-owned subsidiaries; and subsidiaries in which we hold a controlling financial interest as of the financial statement date. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests. We consolidate a variable interest entity ( VIE ) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE. All intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests in the Company’s subsidiaries are reported as a component of liabilities for mandatorily redeemable interests, temporary equity for contingently redeemable interests or permanent equity, separate from the Company’s equity. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations. Segments The Company has 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 Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors ), based on the contractual agreements. The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers. Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected. The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers. Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers. The revenue reserves related to constraints on variable consideration were $ 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. The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. There were no material adjustments to revenues made in the three months ended September 30, 2021 relating to prior periods. Changes in constraints on variable consideration are recorded as a component of net revenues. The Company generally does not allow returns from customers for reasons not covered under the manufacturer’s standard warranty. Therefore, there is no provision for sales return reserves. The Company does not have significant bad debt experience with Payors, and therefore the allowance for doubtful accounts is immaterial. 11 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 income (loss) per share: For the three months ended September 30, (in thousands except per share amounts) 2021 2020 Income (loss) from continuing operations $ 106 $ ( 3,768 ) Income from discontinued operations, net of tax - 67 Net income (loss) $ 106 $ ( 3,701 ) Less: net income (loss) attributable to non-controlling interest, continuing operations 306 ( 120 ) Less: net income attributable to non-controlling interest, discontinued operations - 13 Net loss attributable to Great Elm Group, Inc. $ ( 200 ) $ ( 3,594 ) Weighted average shares basic and diluted: Weighted average shares of common stock outstanding 25,982 25,576 Weighted average shares used in computing income (loss) per share 25,982 25,576 Basic and diluted income (loss) per share from: Loss from continuing operations $ ( 0.01 ) $ ( 0.14 ) Income from discontinued operations - 0.00 Net loss $ ( 0.01 ) $ ( 0.14 ) When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. 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 The ability of DME Inc. to pay dividends is subject to compliance with the restricted payment covenants under the DME Revolver (as defined below). 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. See Note 6 – Related Party Transactions. 12 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 September 30, 2021 2020 (1) Government Payor 37 % 37 % Third-party Payor 13 % 12 % (1) 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: As of September 30, 2021 June 30, 2021 Government Payor 27 % 30 % Third-party Payor 16 % 14 % Recently Adopted Accounting Standards 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: 13 Condensed consolidated balance sheet June 30, 2021 As reported ASU 2020-06 Adjustment June 30, 2021 As adjusted Liabilities Convertible notes $ 22,054 $ 11,279 $ 33,333 Other liabilities 1,070 ( 155 ) 915 Stockholders' equity Additional paid-in-capital 3,319,767 ( 12,154 ) 3,307,613 Accumulated deficit ( 3,265,433 ) 1,030 ( 3,264,403 ) 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 $ ( 1,307 ) $ 162 $ ( 1,145 ) Net loss Net loss ( 3,863 ) 162 ( 3,701 ) Net loss per share (basic and diluted) ( 0.15 ) 0.01 ( 0.14 ) (1) As re-casted to reflect the operations of our real estate business as discontinued operations and therefore excluded. Recently Issued Accounting Standards Current Expected Credit Losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) , which changes the impairment model for financial instruments, including trade receivables from an incurred loss method to a new forward looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical experience, current information and reasonable and supportable forecasts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements. Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 , Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the United Kingdom Financial Conduct Authority which announced the desire to phase out the use of the London Interbank Offered Rate ( LIBOR ) by the end of 2021. The provisions provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. If LIBOR ceases to exist, we may need to renegotiate outstanding notes payable outstanding which extend beyond 2021 with the respective counterparties. Adoption of the provisions in ASU 2020-04 are optional and effective from March 12, 2020 through December 31, 2022. We are currently evaluating the impact of this ASU on our financial statements. 14 3. Revenue The revenues from each major source of revenue are summarized in the following table: For the three months ended September 30, (in thousands) 2021 2020 Product and Services Revenue Investment Management Management Fees $ 876 $ 601 Administration Fees 107 172 983 773 Durable Medical Equipment Equipment Sales 8,730 8,008 Service Revenues 1,346 1,205 10,076 9,213 Total product and services revenue $ 11,059 $ 9,986 Rental Revenues Durable Medical Equipment Medical Equipment Rental Income 5,479 5,397 Total rental revenue 5,479 5,397 Total $ 16,538 $ 15,383 Revenue Accounting Under Topic 606 In determining the appropriate amount of revenue to be recognized under FASB Accounting Standards Codification Topic 606, Revenues ( Topic 606 ) the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) the Company satisfies each performance obligation. Durable Medical Equipment Revenue Equipment Sales and Services Revenues The Company sells durable medical equipment, replacement parts and supplies to customers and recognizes revenue at the point control is transferred through delivery to the customer. Each piece of equipment, part or supply is distinct and separately priced thus they each represent a single performance obligation. The revenue is allocated amongst the performance obligations based upon the relative standalone selling price method, however, items are typically all delivered or supplied together. The customer and, if applicable, the Payors are generally charged at the time that the product is sold, although separate layers of insurance coverage may need to be invoiced before final billings may occur. The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met. 15 The transaction price on both equipment sales and sleep studies is the amount that the Company expects to receive in exchange for the goods and services provided. Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility. As such, we constrain the transaction price for the difference between the gross charge and what we believe we will collect from Payors and from patients. The transaction price therefore is predominantly based on contractual payment rates determined by the Payors. The Company does not generally contract with uninsured customers. We determine our estimates of billing adjustments based upon contractual agreements, our policies and historical experience. While the rates are fixed for the product or service with the customer and the Payors, such amounts typically include co-payments, co- insurance and deductibles, which vary in amounts, from the patient customer. The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the Payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments we estimate will not be collected. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. The Company constrains revenue for these estimated adjustments. There were no material changes in estimates recorded in the 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. The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not incur contract acquisition costs. The Company does not have any partially or unfilled performance obligations related to contracts with customers. However, during the quarter ended June 30, 2020, the Company applied for and received $ 4.4 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS) under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. 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 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 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 The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer. Investment management revenue primarily consists of fees based on a percentage of assets under management; fees based on the performance of managed assets; and administrative fees. Fees are based on agreements with each investment product and may be terminated at any time by either party subject to the specific terms of each respective agreement. 16 Management Fees The Company earns management fees based on the investment management agreements GECM has with GECC and other private funds managed by GECM (collectively, the Funds ). The performance obligation is satisfied over time as the services are rendered, since the Funds simultaneously receive and consume the benefits provided as GECM performs services. Management fee rates range from 1 % to 1.5 % of the management fee assets specified with each agreement. Based on the terms of the specific agreement, management fees may be calculated and billed in advance or in arrears of the period, no less frequently than quarterly. Management fee revenue is recognized over time as the services are provided. Incentive Fees The Company earns incentive fees based on the investment management agreements GECM has with GECC and separately managed accounts. Where an investment management agreement includes both management fees and incentive fees, the performance obligation is considered to be a single obligation for both fees. Incentive fees are variable consideration associated with the GECC investment management agreement. Incentive fees are recognized based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements. Incentive fees range from 5.0 % to 20.0 % of the performance-based metric specified within each agreement. Because of the uncertainty of when incentive fees will be collected due to market conditions and investment performance, incentive fees are fully constrained and not recorded until received and the probability of significant reversal of the fees is eliminated in accordance with the respective investment management agreements. As of 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 The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimburses GECM for costs incurred in performing administrative functions for GECC. This revenue is recognized over time as the services are performed. Administrative fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis. Revenue Accounting Under Topic 842 Durable Medical Equipment Revenue Equipment Rental Revenue Under FASB Accounting Standards Codification Topic 842, Leases ( Topic 842 ) rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis. The contractual length of the lease term varies based on the type of equipment that is rented to the customer, but generally is from 10 to 36 months. In the case of capped rental agreements, title to the equipment transfers to the customer at the end of the contractual rental period. The customer has the right to cancel the lease at any time during the rental period for a subsequent month’s rental and payments are generally billed in advance on a month-to-month basis. Under Topic 842, rental income from operating leases is recognized on a month-to-month basis, based on contractual lease terms when collectability is reasonably assured. Certain customer co-payments are included in revenue when considered probable of payment. 17 The lease term begins on the date products are delivered to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. There were no material changes in estimates recorded in the 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 $ 1.0 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 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. 4. 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) 2020 Discontinued operations: Real estate rental revenue $ 1,272 Real estate expenses 125 Depreciation and amortization 430 Interest expense 650 Net income from discontinued operations $ 67 18 5. Acquisitions 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, and other respiratory products and services in nine locations throughout Kansas and Missouri. The acquisition is accounted for as a business combination. The Company expects to achieve synergies and costs reductions through integrating these operations into our existing durable medical equipment operations. Operating results of the acquired businesses have been included in the consolidated statements of operations since March 1, 2021. The purchase consideration was $ 1.1 million, comprised of $ 0.4 million paid 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. Goodwill was assigned to the durable medical equipment segment and is attributable primarily to expected synergies and the assembled workforce of the acquired business. None of the goodwill is expected to be deductible for income tax purposes. The presentation of pro forma financial disclosures are not required in connection with the AMPM acquisition. The contingent consideration arrangement requires the Company to pay up to $ 2.1 million of additional consideration to the seller if certain revenue thresholds are achieved for the 12 months ending September 1, 2022. The fair value of the contingent consideration arrangement at the acquisition date was $ 0.4 million. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model include volatility of 40.0 % and a discount rate of 10.3 %. The contingent consideration is included within other liabilities in the consolidated balance sheets. 6. Related Party Transactions Related party transactions are measured in part by the amount of consideration paid or received as established and agreed by the parties. Consideration paid for such services in each case is the negotiated value. 19 Durable Medical Equipment In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into a term loan (the Corbel Facility ) with Corbel Capital Partners SBIC, L.P. ( Corbel ). Jeffrey S. Serota, a member of the Company’s Board of Directors, serves as Vice Chairman to Corbel Capital Partners. Corbel previously held an interest in one of our acquired durable medical equipment businesses and was one of the sellers in our acquisition of the business. As a result of the acquisition, at 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 (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. See Note 12 - Borrowings for additional information on the Corbel Facility and Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. In connection with the acquisition of the durable medical equipment businesses, the Company issued non-controlling interests in DME Inc. to the former owners, including Corbel discussed above. 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 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. 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 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. See Note 2 – Summary of Significant Accounting Policies for additional details. The Company has retained the specialized investment company accounting guidance under GAAP with respect to the Consolidated Funds. As such, investments of the Consolidated Funds are included in the condensed consolidated balance sheets at fair value and the net unrealized gain (loss) on those investments is included as a component of other income on the condensed consolidated income statement. Non-controlling interests in these Consolidated Funds are included in net loss attributable to non-controlling interest. As of 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: 20 For the three months ended September 30, (in thousands) 2021 2020 Net (loss) on investments $ ( 116 ) $ ( 1,902 ) Net (loss) on investments of consolidated funds ( 189 ) - Dividend income 554 524 As of (in thousands) September 30, 2021 June 30, 2021 Dividends receivable $ 554 $ 554 Investment management revenues receivable 988 936 Receivable for reimbursable expenses paid 257 297 Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets. Outstanding receivables from the Consolidated Funds are eliminated in consolidation. As of 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. 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. 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. Note and Note 13 – Convertible Notes for additional discussion of the convertible notes. In October 2020, GECM entered into a shared personnel and reimbursement agreement with Imperial Capital Asset Management, LLC ( ICAM ). Jason W. Reese, the Executive Chairman of the Company’s Board of Directors, is the Chief Executive Officer of ICAM. Costs incurred under this agreement are included in investment management expenses in the condensed consolidated statement of operations. For the three months ended September 30, 2021, such costs were $ 0.1 million. General Corporate On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC. Jason W. 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 21 Properties . 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) 2021 2020 Net gain on investment $ 102 $ - Dividend income 99 - Dividend receivable 99 - 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. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. On December 18, 2020, the Company purchased from JPM a 21 % common stock interest in Ligado Networks, LLC ( Ligado ), a privately-held Company. The common stock interest does not convey the ability to exercise significant influence over Ligado, and therefore does not require accounting in accordance with the equity method. We have elected to account for this investment, which does not have a readily-determinable fair value, at cost minus impairment. This investment is included in prepaid and other current assets on our consolidated balance sheet. 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, 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, 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; 22 • HC LLC distributed to the owners of DME Inc. cash of $ 1.9 million and reimbursed GEG $ 1.3 million to cover deal costs; • Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and • JPM acquired 20 % of Forest’s common stock for a purchase price of $ 2.7 million. The Company’s wholly-owned subsidiary, DME Manager, concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $ 0.45 million. (each collectively noted above, the JPM Transactions ). Using proceeds from the JPM Transactions, DME Inc. paid off the Corbel Facility. See Note 12 – Borrowings. 7. Fair Value Measurements Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value: ▪ Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. ▪ Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. ▪ Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below: Fair Value as of September 30, 2021 Level 1 Level 2 Level 3 Total Assets: Equity investments $ 19,141 $ - $ - $ 19,141 Equity investments of Consolidated Funds 26,541 - - 26,541 Total assets within the fair value hierarchy $ 45,682 $ - $ - $ 45,682 Investments valued at net asset value 4,867 Total assets $ 50,549 Liabilities: Participation feature of HC LLC Series A-2 Preferred Stock $ - $ - * * Contingent consideration liability - - 605 605 Total liabilities $ - $ - $ 605 $ 605 23 *Balance eliminates in consolidation. Fair Value as of June 30, 2021 (in thousands) Level 1 Level 2 Level 3 Total Assets: Equity investments $ 19,444 $ - $ - $ 19,444 Equity investments of Consolidated Funds 26,490 - - 26,490 Total assets within the fair value hierarchy $ 45,934 $ - $ - $ 45,934 Investments valued at net asset value 4,600 Total assets $ 50,534 Liabilities: Participation feature of HC LLC Series A-2 Preferred Stock $ - $ - * * Contingent consideration liability - - 271 271 Total liabilities $ - $ - $ 271 $ 271 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) 2021 2020 Beginning balance $ 271 $ - Additions 497 - Change in fair value ( 163 ) - Ending balance $ 605 $ - 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. 24 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 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. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. An embedded derivative was identified in the instrument requiring bifurcation from the host instrument as a derivative to be carried at fair value. The value of the derivative related to a participation feature upon the sale of the durable medical equipment business. As of 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. 25 8. Fixed Assets 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) September 30, 2021 June 30, 2021 Property and Equipment Leasehold improvements $ 839 $ 835 Vehicles 187 172 Computer equipment and software 538 500 Furniture and fixtures 406 422 Sleep study equipment 599 593 2,569 2,522 Accumulated depreciation ( 1,684 ) ( 1,541 ) Net carrying amount $ 885 $ 981 Medical Equipment Held for Rental Medical equipment held for rental $ 15,200 $ 14,933 Accumulated depreciation ( 7,970 ) ( 7,542 ) Net carrying amount $ 7,230 $ 7,391 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 September 30, (in thousands) 2021 2020 Depreciation and amortization $ 143 $ 164 Cost of durable medical equipment rentals 1,688 1,748 Total depreciation expense $ 1,831 $ 1,912 9. Goodwill and Other Intangible Assets 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. The changes in the carrying value of goodwill are as follows: For the three months ended September 30, (in thousands) 2021 2020 Beginning balance $ 50,536 $ 50,010 Acquisition of businesses 1,927 - Purchase accounting adjustment - - Ending balance $ 52,463 $ 50,010 26 The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in thousands): As of September 30, 2021 As of June 30, 2021 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Durable Medical Equipment Tradename $ 9,060 $ ( 2,744 ) $ 6,316 $ 9,060 $ ( 2,511 ) $ 6,549 Hospital contracts 90 ( 26 ) 64 90 ( 15 ) 75 Non-compete agreements 990 ( 578 ) 412 1,370 ( 890 ) 480 10,140 ( 3,348 ) 6,792 10,520 ( 3,416 ) 7,104 Investment Management Investment management agreement 3,900 ( 2,387 ) 1,513 3,900 ( 2,293 ) 1,607 Assembled workforce 526 ( 322 ) 204 526 ( 309 ) 217 4,426 ( 2,709 ) 1,717 4,426 ( 2,602 ) 1,824 Total $ 14,566 $ ( 6,057 ) $ 8,509 $ 14,946 $ ( 6,018 ) $ 8,928 Aggregate Amortization Expense (in thousands) 2021 2020 For the three months ended September 30, $ 419 $ 426 Estimated Future Amortization Expense (in thousands) : For the nine months ending June 30, 2022 $ 1,156 For the year ending June 30, 2023 1,469 For the year ending June 30, 2024 1,267 For the year ending June 30, 2025 1,157 For the year ending June 30, 2026 1,095 Thereafter 2,365 Total $ 8,509 10. Lessor Operating Leases Medical Equipment Leases 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. In addition, the arrangements between the Company and its customers are impacted by arrangements between the Company and Payors. The Payors may cover a portion or all of the rental payments under the agreements between the Company and its customers. The patient is responsible for any residual co-payments. The lease terms may be for a pre-determined time period, generally 10 months to 36 months; however, the customer may cancel the lease at any time and for any reason without penalty and therefore, the Company treats all leases as month-to-month leases. Upon termination of the lease, the equipment, if not aged beyond its useful life, may be refurbished and subsequently sold or leased to another customer. As the leases are month-to-month, there are no future lease receivables under the terms of the current leases. 27 11. Lessee Operating Leases All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets. The following table provides additional details of the leases presented in the balance sheets: (in thousands) September 30, 2021 June 30, 2021 Facilities Right of use assets $ 4,870 $ 5,121 Current portion of lease liabilities 2,089 1,864 Lease liabilities, net of current portion 3,049 3,532 Total liabilities $ 5,138 $ 5,396 Weighted-average remaining life 3.3 years 3.3 years Weighted-average discount rate 11.1 % 11.0 % Vehicles Right of use assets $ 291 $ 87 Current portion of lease liabilities 63 29 Lease liabilities, net of current portion 228 58 Total liabilities $ 291 $ 87 Weighted-average remaining life 4.8 years 3.9 years Weighted-average discount rate 6.5 % 9.8 % Equipment Right of use assets $ 23 $ 33 Current portion of lease liabilities 19 27 Lease liabilities, net of current portion 4 6 Total liabilities $ 23 $ 33 Weighted-average remaining life 1.1 years 1.0 years Weighted-average discount rate 12.5 % 12.5 % 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. 28 Certain operating leases include variable lease costs which are not material and are included in operating lease costs. Additional details are presented in the following table: For the three months ended September 30, (in thousands) 2021 2020 Facilities Operating lease cost $ 554 $ 530 Cash paid for operating leases 552 548 Vehicles Operating lease cost $ 13 $ 7 Cash paid for operating leases 13 7 Equipment Operating lease cost $ 9 $ 11 Cash paid for operating leases 9 11 The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases: (in thousands) For the nine months ending June 30, 2022 $ 1,672 For the year ending June 30, 2023 1,602 For the year ending June 30, 2024 1,335 For the year ending June 30, 2025 806 For the year ending June 30, 2026 538 Thereafter 143 Total lease payments $ 6,096 Imputed interest ( 644 ) Total lease liabilities $ 5,452 Durable Medical Equipment The facility leases include offices, retail and warehouse space and sleep labs. The leases have original or amended terms ranging from 12 to 96 months , some of which include an additional option to extend the lease for up to 120 months. Certain of these leases have variable rental payments tied to a consumer price index or include additional rental payments for maintenance costs, taxes and insurance, which are accounted for as variable rent. The vehicles leases have original lease terms of 60 months from the commencement date of each lease with no option to extend. Each lease may be terminated by the lessee with 30-days’ notice after the first 13 months of the lease subject to certain early termination costs, including residual value guarantees. The lease costs include variable payments for taxes and other fees. Equipment leases consist of office equipment with original lease terms ranging from 36 to 48 months from the commencement date of each lease and may include an option to extend or purchase at the end of the lease term. Certain of these leases include additional rental costs for taxes, insurance and additional fees in addition to the base rental costs. Investment Management and General Corporate The Company has a lease for office space located in Waltham, MA. This office space is allocated between the investment management and general corporate segments. On the commencement date of the lease, the non-cancellable term was for eighty-eight months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty-month period. 29 The lease payments commenced on October 1, 2017, four months after the Company began to occupy the space. On an annual basis, the lease payments increase at an average rate of approximately 2.4 % from $ 28 to $ 32 thousand per month. 12. Borrowings The Company’s subsidiaries’ outstanding borrowings are summarized in the following table: (in thousands) Subsidiaries September 30, 2021 June 30, 2021 Equipment Financing DME Inc. and subsidiaries 2,969 2,041 Less current portion of capitalized equipment financing ( 2,927 ) ( 1,974 ) Equipment financing debt, net of current portion $ 42 $ 67 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: (in thousands) Principal Due For the nine months ending June 30, 2022 $ 2,927 For the year ending June 30, 2023 42 Total $ 2,969 Additional details of each borrowing by operating segment are discussed below. Durable Medical Equipment 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. and HC LLC Series A-1 Preferred Stock. See Note 6 – Related Party Transactions and Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. Principal payments and interest expense incurred on the Corbel Facility are summarized in the following table: For the three months ended September 30, (in thousands) 2021 2020 Principal payments $ - $ 354 Interest expense - 661 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 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 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. 30 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 . 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. 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 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 ). 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 GP Corp. and certain board appointment rights from MAST Capital. In exchange, GEG issued $ 2.3 million of Convertible Notes. As MAST Capital is a related party, no gain was recorded on the transaction. The difference in carrying value between the instruments purchased (including the GP Corp. Note and MAST Capital’s non-controlling interests) and that of the newly issued convertible notes was treated as a capital contribution and recorded to additional paid in capital in the amount of $ 0.6 million. Payments and interest expense incurred on the GP Corp. Note are summarized in the following table: For the three months ended September 30, (in thousands) 2021 (1) 2020 Principal payments $ - $ - Interest expense - 26 (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. 13. Convertible Notes 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. ( Northern Right ), a significant shareholder. Mr. 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. Mr. Reese is the executive chairman of the Company’s Board of Directors. ▪ $ 0.7 million issued to entities associated with Eric J. Scheyer, a member of the Company’s Board of Directors. ▪ $ 2.3 million issued to MAST Capital, owner of 7.4 % of our outstanding company stock. 31 The Convertible Notes accrue interest at 5.0 % per annum, payable semiannually in arrears on June 30 and December 31, commencing June 30, 2020, in cash or in kind at the option of the Company. Each $1,000 principal amount of the Convertible Notes are convertible into 288.0018 shares of the Company’s common stock, subject to the terms therein, prior to maturity at the option of the holder. The Company may, subject to compliance with the terms of the Convertible Notes, effect the conversion of some or all of the Convertible Notes into shares of common stock, subject to certain liquidity and pricing requirements, as specified in the Convertible Notes. 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. 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. 14. CARES Act 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 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. We have accounted for such proceeds as in-substance government grants by analogizing to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance . 32 15. Non-Controlling Interests and Preferred Stock of Subsidiaries Non-Controlling Interests of Subsidiaries 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) September 30, 2021 June 30, 2021 HC LLC Temporary equity 2,844 2,639 Permanent equity 2,844 2,639 Total DME Inc. 5,688 5,278 GEC GP Permanent equity ( 82 ) ( 79 ) Consolidated Funds Permanent equity 4,671 4,228 Forest Permanent equity 2,744 2,761 Total Non-controlling interests $ 13,021 $ 12,188 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 September 30, (in thousands) 2021 2020 DME Inc. Temporary equity - ( 46 ) Permanent equity - ( 46 ) Total DME Inc. - ( 92 ) HC LLC Temporary equity 205 - Permanent equity 205 - Total DME Inc. 410 - GP Corp. Permanent equity - ( 28 ) GEC GP Permanent equity ( 2 ) - Consolidated Funds Permanent equity ( 85 ) - Forest Permanent equity ( 17 ) - FM Holdings Permanent equity - 13 Total $ 306 $ ( 107 ) 33 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. The holder of the interest has a board observer rights for the DME Inc. board of directors, but no voting rights. DME Inc. has the right of first offer if the holder desires to sell the security and in the event of a sale of DME Inc., the holder must sell their securities (drag along rights) and has the right to participate in sales of DME Inc. securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder owns 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of DME Inc. has not commenced and (iii) the holder has not had an earlier opportunity to sell its shares at their fair market value, the holder has the right to request a marketing process for a sale of DME Inc. and has the right to put its common shares to DME Inc. at the price for such shares implied by such marketing process. The Company also has the right to call the holder’s common shares at such price. The holder of the non-controlling interest is entitled to participate in earnings of DME Inc. and is not required to fund losses. As the redemption is contingent upon future events outside of the Company’s control which are not probable, the Company has classified the non-controlling interest as temporary equity and its fair value on the date of issuance, adjusted for any earnings in DME Inc. 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. 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. The rights are consistent with the non-controlling interest classified as temporary equity, other than the holder does not have a contingent put right. Accordingly, Company has classified the non-controlling interest as permanent equity at its fair value on the date of issuance, adjusted for any earnings in DME Inc. 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. GP Corp. – Non-controlling interest classified as permanent equity In connection with the acquisition of the investment management business in November 2016, the Company issued certain affiliates and employees of the Company a 19.9 % interest in GP Corp. During the 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. 34 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. Note. 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 In connection with the JPM Transactions on December 29, 2020, the Company sold JPM a 20.0 % common stock interest in Forest in exchange for $ 2.7 million. JPM has a representative on the Forest board of directors and the right to designate a number of directors commensurate with their common stock ownership interest. Forest has the right of first offer if the holder desires to sell the security and in the event of a sale of Forest, the holder must sell their securities (drag along rights) and has the right to participate in sales of Forest securities (tag along rights). The holder of the non-controlling interest is entitled to participate in earnings of Forest and is not required to fund losses. The holder of this non-controlling interest, JPM, is also the holder of Forest Preferred Stock discussed below. See Note 6 – Related Party Transactions. 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 shares): Balance, as of June 30, 2021 Issuance of Preferred Stock Redemption of Preferred Stock Balance, as of September 30, 2021 HC LLC Series A-1 Preferred Stock 10,090 - - 10,090 Series A-2 Preferred Stock 34,010 - - 34,010 Total HC LLC 44,100 - - 44,100 Forest Forest Preferred Stock 35,010 - - 35,010 Total 79,110 - - 79,110 There was no preferred stock activity during the three months ended September 30, 2021. 35 HC LLC - Series A-1 Preferred Stock classified as a liability In connection with the JPM Transactions, the Company issued 10,090 shares of Series A-1 Preferred Stock with a face value of $ 1,000 per share at issuance. The shares were issued pro-rata to the stockholders of DME Inc. in the form of a distribution and no consideration was provided in exchange for such instruments. The shares provide for a 9 % annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $ 1,000 per share on the earlier of certain redemption events or December 29, 2027 . The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of Company at a redemption price equal to face value. The shares rank senior and have preference to the common shares of HC LLC. The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights. As the shares of Series A-1 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations. The fair value of each share of Series A-1 Preferred Stock on the issuance date was determined to be $ 801 per share. The difference between the fair value and the redemption value of $ 1,000 per share as well as debt issuance costs of $ 0.2 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7 -year period to redemption using the effective interest method. The holders of the Series A-1 Preferred Stock include our majority-owned consolidated subsidiary Forest ( 8,082 shares), as well as Corbel and VHG (each 1,004 shares), who are also the holders of non-controlling interests in DME Inc. discussed above. See Note 6 – Related Party Transactions. Such shares of Series A-1 Preferred Stock issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation. HC LLC Series A-2 Preferred Stock classified as a liability In connection with the JPM Transactions, the Company issued 34,010 shares of Series A-2 Preferred Stock with a face value of $ 1,000 per share at issuance. The shares were issued to Forest in exchange for cash equal to the face value of such shares. The shares provide for a 9 % annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $ 1,000 per share on December 29, 2027 , or at a 0 - 3 % premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0 - 3 % premium then in place. The shares rank senior and have preference to the common shares of HC LCC. The shares are non-voting and contain standard protective rights. In addition, upon a sale of the durable medical equipment business, the holders of HC LLC Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33 % of proceeds arising from such sale. As the shares of Series A-2 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations. We have identified the feature allowing holders of the HC LLC Series A-2 Preferred Stock to participate in up to 33% of proceeds arising from a sale of the durable medical equipment business as an embedded derivative. We have bifurcated this embedded derivative from the mandatorily redeemable preferred stock host and have recorded the derivative liability at fair value. The fair value of the derivative liability on the issuance date was $ 6.5 million, and will be marked to fair value at each reporting date going forward. The fair value of each share of Series A-2 Preferred Stock on the issuance date was determined to be $ 810 per share. The difference between the fair value and the redemption value of $ 1,000 per share as well as debt issuance costs of $ 1.1 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7 -year period to redemption using the effective interest method. 36 The holder of the Series A-2 Preferred Stock is our majority -owned consolidated subsidiary Forest. Such shares and related embedded derivatives issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation. Forest Preferred Stock classified as a liability In connection with the JPM Transactions, Forest issued 35,010 shares of preferred stock in Forest with a face value of $ 1,000 per share at issuance. The preferred shares were sold to JPM in exchange for cash equal to the face value of such shares. The preferred shares provide for a 9 % annual dividend, which is payable quarterly. The preferred shares are mandatorily redeemable by the Company at their face value of $ 1,000 per share on December 29, 2027 , or at a 0 - 3 % premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include the occurrence of an ownership change that triggers an IRC §382 limitation which reduces Forest net operating loss carryforwards to less than $ 300 million. The preferred shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0 - 3 % premium then in place. The preferred shares rank senior and have preference to the common shares of Forest. The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights. As the preferred shares are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the preferred stock are included in interest expense in the consolidated statement of operations. The fair value of each share of Forest Preferred Stock on the issuance date was determined to equal its face value based on the transaction price. Debt issuance costs of $ 1.2 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7 -year period to redemption using the effective interest method. The holder of the Forest Preferred Stock is JPM, who is also the holder of the non-controlling interests in Forest discussed above. See Note 6 – Related Party Transactions. 16. Stockholders’ Equity 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 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 months ended September 30, 2021 the Company granted 7,845 and 140,294 shares of restricted stock units to employees and directors, respectively. 37 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 Restricted Stock (in thousands) Weighted Average Grant Date Fair Value Outstanding at June 30, 2021 904 $ 3.71 Granted 253 2.38 Vested ( 130 ) 2.55 Forfeited - - Outstanding at September 30, 2021 1,027 $ 3.57 Stock Options The following table summarizes the Company’s option award activity as of and through September 30, 2021: Options Shares (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2021 2,493 $ 3.69 4.51 $ - Options granted 18 2.87 - - Exercised - - - - Forfeited, cancelled or expired - - - - Outstanding at September 30, 2021 2,511 $ 3.69 4.27 $ - Exercisable at September 30, 2021 2,061 $ 3.65 4.01 $ - Vested and expected to vest as of September 30, 2021 2,511 $ 3.69 4.27 $ - 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. 17. Income Tax 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 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. 38 18. Commitments and Contingencies From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows. 19. Segment Information The Company allocates resources based on 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 September 30, 2021 (in thousands) Durable Medical Equipment Investment Management (1) General Corporate (1) Intercompany Eliminations (2) Consolidated Total Revenue: Total revenue $ 15,555 $ 983 $ 243 $ ( 243 ) $ 16,538 Operating costs and expenses: Cost of durable medical equipment sold and services ( 4,060 ) - - - ( 4,060 ) Cost of durable medical equipment rentals ( 1,850 ) - - - ( 1,850 ) Depreciation and amortization ( 453 ) ( 109 ) - - ( 562 ) Non-cash compensation (3) - ( 396 ) ( 372 ) - ( 768 ) Transaction costs (4) ( 97 ) - ( 184 ) - ( 281 ) Other selling, general and administrative ( 6,286 ) ( 843 ) ( 1,130 ) 243 ( 8,016 ) Total operating expenses ( 12,746 ) ( 1,348 ) ( 1,686 ) 243 ( 15,537 ) Other income (expense): Interest expense ( 1,287 ) ( 24 ) ( 1,269 ) 1,218 ( 1,362 ) Other income (expense) 560 249 875 ( 1,218 ) 466 Total other income (expense), net ( 727 ) 225 ( 394 ) - ( 896 ) Total pre-tax income (loss) $ 2,082 $ ( 140 ) $ ( 1,837 ) $ - $ 105 39 For the three months ended September 30, 2020 (in thousands) Durable Medical Equipment Investment Management (1) General Corporate (1) Intercompany Eliminations (2) Consolidated Total Revenue: Total revenue $ 14,610 $ 773 $ 91 $ ( 91 ) $ 15,383 Operating costs and expenses: Cost of durable medical equipment sold and services ( 4,207 ) - - - ( 4,207 ) Cost of durable medical equipment rentals ( 1,915 ) - - - ( 1,915 ) Depreciation and amortization ( 463 ) ( 128 ) - - ( 591 ) Non-cash compensation (3) - ( 194 ) ( 235 ) - ( 429 ) Transaction costs (4) - - ( 32 ) - ( 32 ) Other selling, general and administrative ( 7,771 ) ( 532 ) ( 1,146 ) 91 ( 9,358 ) Total operating expenses ( 14,356 ) ( 854 ) ( 1,413 ) 91 ( 16,532 ) Other income (expense): Interest expense ( 709 ) ( 26 ) ( 410 ) ( 1,145 ) Other income (expense) ( 3 ) ( 1,377 ) 5 - ( 1,375 ) Total other income (expense), net ( 712 ) ( 1,403 ) ( 405 ) - ( 2,520 ) Total pre-tax income (loss) $ ( 458 ) $ ( 1,484 ) $ ( 1,727 ) $ - $ ( 3,669 ) (1) 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. (2) 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 HC LLC. and revenue to DME Manager are eliminated in consolidation. Beginning December 29, 2020, DME Manager also provides advisory services to Forest and receives a consulting fee from Forest for those services. Both DME Manager and Forest are part of general corporate operations, and the corresponding revenue and expense are eliminated in consolidation. Additionally, Forest owns Series A-1 Preferred Stock and Series A-2 Preferred Stock of HC LLC. Forest is part of general corporate operations while HC LLC is part of the durable medical equipment segment. The corresponding interest expense to HC LLC and interest income to Forest are eliminated in consolidation. (3) 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. (4) Transaction costs, which consist of legal and other professional services incurred in connection with consummated and unconsummated transactions, are included in selling, general and administrative expense in the condensed consolidated statements of operations. 40 The following tables illustrate assets by segment: As of September 30, 2021 (in thousands) Durable Medical Equipment Investment Management General Corporate Total Fixed assets, net $ 8,093 $ 21 $ 1 $ 8,115 Identifiable intangible assets, net 6,792 1,717 - 8,509 Goodwill 52,463 - - 52,463 Other assets 20,872 49,387 21,774 92,033 Total $ 88,220 $ 51,125 $ 21,775 $ 161,120 As of June 30, 2021 (in thousands) Durable Medical Equipment Investment Management General Corporate Total Fixed assets, net $ 8,349 $ 21 $ 2 $ 8,372 Identifiable intangible assets, net 7,104 1,824 - 8,928 Goodwill 50,536 - - 50,536 Other assets 21,150 66,907 5,976 94,033 Total $ 87,139 $ 68,752 $ 5,978 $ 161,869 41