Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a holding company seeking to acquire assets and businesses, where our people and other assets provide a competitive advantage. We currently have two business operating segments: durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations.
Our durable medical equipment business specializes in the distribution of respiratory care equipment, including positive air pressure equipment and supplies, ventilators and oxygen equipment, and provides sleep study services.
Our investment management business manages a business development company, Great Elm Capital Corp. ( GECC ), a credit-focused private fund, Great Elm Opportunities Fund I, LP, a Special Purpose Acquisition Company (SPAC)-focused fund, Great Elm SPAC Opportunity Fund, LLC, and separate accounts for an institutional investor. The combined assets under management of these entities at September 30, 2021 was approximately $291.9 million.
The operations of our general corporate segment encompass our corporate headquarters operations, in addition to management consulting services provided to certain of our subsidiaries.
We continue to explore other opportunities in the durable medical equipment and investment management sectors, as well as opportunities in other areas that we believe provide attractive risk-adjusted returns on invested capital. As of the date of this report, we have not entered into any binding commitments to make additional acquisitions or investments in any of these areas.
As of June 30, 2021, we had $952 million of net operating loss ( NOL ) carryforwards for federal income tax purposes.
Discontinued Operations
We launched our real estate business in March 2018 with an investment in a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property ). The Property was fully-leased, on a triple-net basis, to a single tenant through March 31, 2030. In June 2021, we sold the real estate business. Previously reported financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations.
Holding Company Reorganization
On December 29, 2020, Great Elm Group, Inc. (the Company or GEG ) completed a reorganization of the Company’s corporate structure (the Holding Company Reorganization ), where Great Elm Capital Group, Inc. ( GEC ) changed its name to Forest Investments, Inc. ( Forest ) and became a wholly owned subsidiary of a new holding company, the Company. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG.” Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Exchange Act. The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.
Following the consummation of the Holding Company Reorganization, J.P. Morgan Broker-Dealer Holdings Inc. ( JPM ), a Delaware corporation and affiliate of JPMorgan Chase & Co., Forest, the Company and JPM agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.
42
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;
•
Great Elm Healthcare, LLC ( HC LLC ) issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock ) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to Great Elm DME, Inc. ( DME Inc .), which in turn distributed such preferred stock pro rata to the holders of its common stock such that 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel Capital Partners SBIC, L.P. ( Corbel ), and 9.95% is held by Valley Healthcare Group, LLC ( VHG ). Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;
•
HC LLC, a wholly-owned subsidiary of DME Inc., and sole owner of the durable medical equipment operating subsidiaries, issued to Forest 34,010 newly issued shares of 9.0% Series A-2 preferred stock (the Series A-2 Preferred Stock ) with a maturity date of December 29, 2027 for $1,000.00 per share. Upon a sale of the durable medical equipment business, such holders of Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale;
•
HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;
•
Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and
•
JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million. The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC ( DME Manager ), concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $0.45 million.
(each collectively noted above, the JPM Transactions ).
Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility ).
COVID-19
During the three months ended September 30, 2021, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic. In particular, the investment management business continues to experience reduced assets under management in our managed portfolios as compared to pre-pandemic levels. COVID-19 may continue to impact such managed portfolios as well as the value of the shares of GECC held by the Company in the future. In addition, the durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups. In addition, indirectly attributable to the COVID-19 pandemic the durable medical equipment industry has been impacted by global supply chain challenges most notably shortages in semiconductor microchips. These shortages have impacted our ability to purchase positive air pressure ( PAP ) devices during the most recent quarter in accordance with our normal procurement process. Although we were able to meet patient demand for such devices during the quarter, our on-hand inventory of PAP devices decreased during the quarter. The impact of COVID-19 continues to evolve and its duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time. However, the Company expects to continue to experience decreased durable medical equipment rental revenues in the near future due to the reduction in new patient set-ups during the pandemic and due to the supply chain issues noted above. Should the disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business and operations.
In addition, COVID-19 may impact our ability to act on new acquisitions or other business opportunities.
43
The Company prioritizes the health and safety of employees and customers. Beginning in early March 2020, all employees at our corporate headquarters as well as certain employees of DME Inc. moved to a remote-working model. In addition, the officers of the Company have maintained regular communications with key service providers, including legal and accounting professionals, other consultants and vendors, noting that those firms have similarly moved to remote-working models to the extent possible. Such employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary.
At DME Inc. we invested in virtual patient set-ups which allow our respiratory therapists to interact with patients by video to maintain social distance. Certain other employees whose responsibilities have been impacted by social distancing have been temporarily redeployed within the organization. DME Inc. has experienced increased operating expenses related to paid employee absences due to COVID-19 illnesses and exposures, costs related to cleaning and disinfecting workspaces, and additional shipping costs for remote set-ups.
We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, particularly with respect to the travel restrictions, business closures and other quarantine measures imposed on our employees, suppliers and service providers by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our operating companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future. During the three months ended September 30, 2021, we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 as it relates to recurring transactions, except as follows:
On July 1, 2021 the Company adopted the Financial Accounting Standards Board’s Accounting Standard Update 2020-06 , Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by eliminating certain separation models. Under the full retrospective method of adoption, previously reported financial information has been recast to reflect the adoption of this accounting standard in those periods.
44
Results of Operations
The following discussion reflects the historical performance of our two business operating segments and general corporate.
The following table provides the results of our consolidated operations:
For the three months ended September 30,
2021
Percent Change
2020
Revenue:
Total revenue
$
16,538
8
%
$
15,383
Operating costs and expenses:
Cost of goods sold
(4,060
)
(3
)%
(4,207
)
Cost of rentals
(1,850
)
(3
)%
(1,915
)
Other selling, general and administrative
(9,065
)
(8
)%
(9,819
)
Depreciation and amortization
(562
)
(5
)%
(591
)
Total operating expenses
(15,537
)
(16,532
)
Operating income (loss)
1,001
(1,149
)
Other income (expense):
Interest expense
(1,362
)
19
%
(1,145
)
Other income (expense)
466
(134
)%
(1,375
)
Total other expense, net
(896
)
(2,520
)
Total pre-tax income (loss)
$
105
$
(3,669
)
Revenue
Revenues for the three months ended September 30, 2021 increased $1.2 million as compared to the corresponding period in the prior year. The increase is primarily attributable to a $1.0 million increase in durable medical equipment revenues. The growth reflects revenue contributions from the acquisitions of Advanced Medical DME, LLC and PM Sleep Lab, LLC (collectively, AMPM ) in March 2021 and of MedOne Healthcare LLC ( MedOne ) in August 2021. In addition, we noted organic growth in resupply sales within the durable medical equipment business, which was partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups. Investment management revenues also increased $0.2 million related to increases in assets under management as compared to the prior period.
Operating costs and expenses
Operating costs for the three months ended September 30, 2021 decreased $1.0 million as compared to the corresponding period in the prior year. The decrease is primarily related to $2.4 million in Employee Retention Credits claimed during the quarter under the enhanced Coronavirus Aid, Relief, and Economic Security Act ( CARES Act ). This decrease was partially offset by increases of $0.8 million in other durable medical equipment costs primarily related to the operations of AMPM and MedOne, and $0.8 million in investment management expenses primarily related to increased compensation.
Other income (expense)
Interest expense increased by $0.2 million for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to current period interest on the $37.0 million face value externally-held preferred stock in Forest and HC LLC which were issued in December 2020. In conjunction with the issuance of this preferred stock, we extinguished the Corbel Facility which had $24.8 million in principal outstanding on September 30, 2020.
Other income and expense for the three months ended September 30, 2021 and 2020 primarily consisted of dividend income and net unrealized gains and losses on the Company’s investment in GECC and private funds which is discussed in more detail under “—Investment Management” below.
45
Durable Medical Equipment Business
The key metrics of our durable medical equipment business include:
▪
Patients and setup growth – which drives revenue growth and takes advantage of scalable operations; and
▪
Earnings before interest, taxes, depreciation and amortization ( EBITDA )
The following table provides the results of our durable medical equipment business:
For the three months ended September 30,
(in thousands)
2021
Percent Change
2020
Revenue:
Total revenue
$
15,555
6
%
$
14,610
Operating costs and expenses:
Cost of goods sold
(4,060
)
(3
)%
(4,207
)
Cost of rentals
(1,850
)
(3
)%
(1,915
)
Transaction costs
(97
)
-%
-
Other selling, general and administrative
(6,286
)
(19
)%
(7,771
)
Depreciation and amortization
(453
)
(2
)%
(463
)
Total operating expenses
(12,746
)
(14,356
)
Other income (expense):
Interest expense
(1,287
)
82
%
(709
)
Other income (expense)
560
NM
(3
)
Total other expense, net
(727
)
(712
)
Operating income (loss):
Total pre-tax income (loss)
$
2,082
$
(458
)
Durable Medical Equipment Revenue
For the three months ended September 30, 2021, revenues from the sale of medical equipment and sleep study services were $8.7 million and $1.3 million, respectively, while for the three months ended September 30, 2020, such revenues were $8.0 million and $1.2 million, respectively. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021 as well as organic growth in resupply sales.
For the three months ended September 30, 2021, rental revenue was $5.5 million as compared to $5.4 million for the three months ended September 30, 2020. This decrease is due primarily to reduced referral pipelines for new equipment set-ups during the ongoing COVID-19 pandemic, which are customarily driven by in-house or external sleep studies. The contributions of AMPM and MedOne were mostly offset by overall decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups.
Durable Medical Equipment Operating Costs and Expenses
Cost of goods sold includes inventory costs for medical equipment sold and direct costs associated with running sleep study services, including staff compensation to perform the studies and the purchase of supplies used in the studies. Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses. The favorable margins as compared to the prior period are primarily due to favorable negotiated volume pricing with strategic vendors.
46
General and administrative expenses consist of employee-related, facility-related, freight and shipping, information technology and other costs. For the three months ended September 30, 2021, these amounts are net of government stimulus received under the CARES Act of $2.3 million related to employee retention tax credits. Excluding such stimulus, employee-related costs were $6. 1 million and $5.2 million for the three months ended September 30, 2021 and 2020, respectively. The increase in employee related costs is primarily due to additional payroll-related costs relating to acquired AMPM and MedOne employees. Facility-related expenses of $0.8 million and freight and shipping costs of $0.4 million remained consistent in the comparative periods. Information technology costs were $0.6 million and $0.5 million, respectively, with increases due to the AMPM and MedOne acquisitions. Other costs were $0.7 million and $0.9 million, respectively, primarily consisting of professional fees. Other costs were benefited in the current period by $0.2 million related to change in fair value of contingent consideration.
Transaction costs increased for the three months ended September 30, 2021 of $0.1 million primarily relate to one-time expenses incurred in the acquisition of MedOne, whereas no acquisitions were noted in the prior period.
Depreciation and amortization includes the depreciation of fixed assets, excluding depreciation on the equipment held for rental, which is included in the cost of rentals, and amortization of the intangible assets resulting from the acquisition of the durable medical equipment businesses. Depreciation and amortization for the three months ended September 30, 2021 and 2020 remained consistent at $0.5 million.
Durable Medical Equipment Other Expenses
The increase in interest expense for the three months ended September 30, 2021 as compared to the corresponding period in the prior year is attributable primarily to higher outstanding principal balances of the HC LLC preferred stock of $44.1 million as compared to $25.3 million outstanding under the Corbel Facility and DME Revolver (as defined below) as of September 30, 2020.
During the three months ended September 30, 2021, the Company recognized a $0.5 million benefit within the durable medical equipment business related to the recurring fair value adjustment of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest. This has an off-setting impact in our General Corporate activity and eliminates in consolidation.
47
Investment Management Business
The key metrics of our investment management business are:
•
Assets under management ― which provides the basis on which our management fees and performance milestones for vesting of certain equity awards are based; and
•
Investment performance ― on which our incentive fees (if any) are based and on which we are measured against our competition.
The following table provides the results of our investment management business:
For the three months ended September 30,
(in thousands)
2021
Percent Change
2020
Revenue:
Total revenue
$
983
27
%
$
773
Operating costs and expenses:
Non-cash compensation
(396
)
104
%
(194
)
Transaction Costs
-
-%
-
Other general and administrative
(843
)
58
%
(532
)
Depreciation and amortization
(109
)
(15
)%
(128
)
Total operating expenses
(1,348
)
(854
)
Other income (expense):
Interest expense
(24
)
(8
)%
(26
)
Other income (expense)
249
(118
)%
(1,377
)
Total other expense, net
225
(1,403
)
Operating income (loss):
Total pre-tax income (loss)
$
(140
)
$
(1,484
)
Investment Management Revenue
Investment management revenues include management fees and administrative fees. For the three months ended September 30, 2021 and 2020, management fees were $0.9 million and $0.6 million, respectively, and administrative fees were $0.1 million and $0.2 million, respectively. The increase in management fees for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 is attributable to increases in the average assets on which such fees are calculated through growth of GECC and GESOF.
Investment Management Costs and Expenses
Non-cash compensation compensation was impacted by annual awards granted in September 2021, whereas no awards were granted to the investment team in the prior year. Other general and administrative costs consist primarily of professional fees, facilities and other overhead costs, and payroll and related costs, excluding stock-based compensation. The increase in general and administrative costs for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, is primarily attributable to an increase in allocated payroll costs and consulting fees.
Investment Management Other Income (Expense)
Other income and expense primarily consisted of dividend income and net realized and unrealized losses on the Company’s investment in GECC and the net realized and unrealized losses of consolidated funds. Dividend income from GECC for the three months ended September 30, 2021 and 2020 was $0.6 million and $0.5 million, respectively. We recognized net realized and unrealized losses on our investment in GECC and the investments of the consolidated funds of $0.3 million for the three months ended September 30, 2021 as compared to net unrealized loss of $1.9 million on our investment in GECC for the three months ended September 30, 2020. We mark-to-market our investment in GECC and underlying investments of consolidated funds by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end.
48
Interest expense for the three months ended September 30, 2021 remained consistent with the three months ended September 30, 2020
General Corporate
The following table provides the results of our general corporate activities:
For the three months ended September 30,
(in thousands)
2021
Percent Change
2020
Revenue:
Total revenue
$
243
167
%
$
91
Operating costs and expenses:
Non-cash compensation
(372
)
58
%
(235
)
Transaction costs
(184
)
475
%
(32
)
Other general and administrative
(1,130
)
(1
)%
(1,146
)
Depreciation and amortization
-
-%
-
Total operating expenses
(1,686
)
(1,413
)
Other income (expense):
Interest expense
(1,269
)
210
%
(410
)
Other income (expense)
875
NM
5
Total other income (expense), net
(394
)
(405
)
Operating income (loss):
Total pre-tax income (loss)
$
(1,837
)
$
(1,727
)
General Corporate Revenue
For the three months ended September 30, 2020, all revenue was derived from fees earned by DME Manager, which provides consulting services to DME Inc. In addition to this revenue, the three months ended September 30, 2021, revenue includes $0.1 million in fees earned by DME Manager relating to consulting services provided to Forest.
General Corporate Costs and Expenses
Our general and administrative costs primarily consisted of professional fees and payroll costs in connection with our general corporate oversight of our subsidiaries and diligence efforts towards identifying asset and business acquisition opportunities. Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities.
Non-cash compensation, increased $0.1 million for the three months ended September 30, 2021 as compared to the corresponding period in the prior year. The increase was due primarily to the election of directors to receive their compensation in the form of shares instead of cash, which had a corresponding decrease in other general and administrative costs.
The decrease in other general and administrative costs for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 is primarily attributable to the impact of director stock-based compensation discussed above.
Other Income (Expense)
Interest expense for the three months ended September 30, 2021 consists primarily of interest on the convertible notes, as well as on Forest Preferred Stock, which was issued in December 2020. The corresponding periods in the prior year does not include interest on the Forest Preferred Stock, as it was not outstanding in the prior period.
49
Other income (expense) during the current year is comprised of intercompany interest income of $ 1.2 million related to Forest's investments in HC LLC preferred stock , and $0.2 million in dividends and unrealized gains on our investment in Monomoy Properties, LLC . This amount is partially offset by a $0.5 million charge related to changes in the valuation of the embedded derivative. This income has corresponding charges in the durable medical equipment business and such impacts are eliminated in consolidation. Since the preferred stock was issued in December 2020, there is no corresponding activity in the prior year.
Income Taxes
As of June 30, 2021, the Company had NOL carryforwards for federal and state income tax purposes of approximately $952 million and $198 million, respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2022 through 2037. The federal NOL carryforwards generated in fiscal year 2018 or later can be carried forward indefinitely. The California NOL carryforwards of $185 million will expire from 2029 through 2037. The Massachusetts NOL carryforwards of $13 million will expire from 2031 to 2038. The state NOL carryforwards will expire from 2029 through 2038. The Company assesses NOL carryforwards based on taxable income on an annual basis.
Liquidity and Capital Resources
Cash Flows
Cash flows used in operating activities for the three months ended September 30, 2021 were $1.0 million. The net cash outflow was primarily the result of our net loss of $0.1 million, along with a decrease in prepaid assets of $1.4 million, an increase of deferred revenues of $1.2 million due to the ERC during the period, $0.7 million in net purchases of investments within our consolidated funds and $0.6 million due to the timing of cash payments and receipts within our receivables and payables. These outflows were partially offset by non-cash inflows of $2.2 million related to depreciation and amortization and $0.6 million in stock-based compensation.
Cash flows provided by operating activities for the three months ended September 30, 2020 were $1.2 million. The net cash inflow in our continuing operations was primarily the result of our net loss from continuing operations of $3.8 million offset by non-cash charges of $2.8 million, along with unrealized loss on investments of $1.9 million. Additional fluctuations in these accounts are due to the timing of cash payments and cash receipts in the normal course of business.
Cash flows used in investing activities for the three months ended September 30, 2021 were $3.2 million. The net cash outflow primarily consisted of $1.3 million due to acquisition of MedOne, along with $2.5 million of purchases of capital equipment, partially offset by $0.6 million in proceeds from sales of equipment held for rental and disposal of property and equipment
Cash flows used in investing activities for the three months ended September 30, 2020 were $15.0 million. The net cash outflow primarily consisted of $13.6 million due to the participation of the Rights Offering of GECC. Additionally, there was $1.6 million in purchases of equipment for rental partially offset by $0.2 million in proceeds from sale of equipment held for rental and disposal of property and equipment.
Cash flows provided by financing activities for the three months ended September 30, 2021 were $1.6 million which primarily consisted of proceeds from equipment financing of $2.1 million and capital contributions to our consolidated funds of $0.5 million, partially offset by principle payments of the equipment financing totaling $1.2 million.
Cash flows provided by financing activities for the three months ended September 30, 2020 were $4.3 million which consisted of net principal payments on durable medical equipment debt of $4.3 million.
Financial Condition
As of September 30, 2021, we had an unrestricted cash balance of $21.8 million. We also hold 5,484,669 shares of GECC common stock with an estimated fair value of $19.1 million as of September 30, 2021.
50
We intend to make acquisitions or investments that we believe will result in the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.
Borrowings
As of September 30, 2021, the Company had $34.3 million face value in convertible notes outstanding. The convertible notes are held by a consortium of investors, including related parties. The convertible notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and December 31, in cash or in kind at the option of the Company.
The convertible notes are due on February 26, 2030, but are convertible at the option of the holders, subject to the terms therein, prior to maturity into shares of our common stock. Upon conversion of any note, the Company will pay or deliver, as the case may be, to the noteholder, in respect of each $1,000 principal amount of notes being converted, shares of common stock equal to the conversion rate in effect on the conversion date, together with cash, if applicable, in lieu of delivering any fractional share of common stock.
As of September 30, 2021, JPM held $35.0 million face value in shares of Forest Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest’s net operating loss carryforwards to less than $300 million. The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The 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 of September 30, 2021, Corbel and VHG, both related parties, held a combined $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. 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.
The HC LLC Series A-1 Preferred Stock includes covenants that limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions. In order to incur certain additional debt, DME Inc. must also comply with a leverage ratio and levered free cash flow ratio, which are based in part on the HC LLC EBITDA levels.
The Company has a credit facility with Pacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (at September 30, 2021, the effective rate was 3.7%) through maturity on November 29, 2022 (the DME Revolver ). The DME Revolver allows for borrowings up to $10 million. The DME Revolver requires monthly interest payments. The DME Revolver is secured by all of the assets of the durable medical equipment business and the Company is required to meet certain financial covenants. The DME Revolver was not drawn as of September 30, 2021.
51
The DME Revolver include s covenants that restrict HC LLC . business operations to its current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions. Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of HC LLC . HC LLC must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the HC LLC EBITDA levels. The Company was in compliance with all material covenants and restrictions at September 30, 2021
HC LLC’s operating subsidiaries also utilize equipment financing debt to fund certain inventory and equipment purchases from suppliers. These equipment financing debt agreements are entered into with 3rd party banks and are generally payable in equal installments over terms of one to three years, depending on the nature of the underlying purchases being financed. The debt is secured by the inventory and equipment, as applicable, of the operating subsidiaries entering into the agreements, and the long-term agreements have implicit interest rates between 7 – 8%. As of September 30, 2021, the Company had $3.0 million in equipment financing debt outstanding.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the market risks discussed in Item 7A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.