What changed in this filing

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Item 1. Financial Statements

2022-02-10 compared with 2021-11-12 · 221 added, 139 removed, 1038 unchanged (26% of the section changed)

3 unchanged sentences

Dollar amounts in thousands (except per share data)

September 30, 2021

December 31, 2021

June 30, 2021

23 unchanged sentences

Lease liabilities, net of current portion

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

Convertible notes (face value $ 35,205 and $ 34,346 , respectively, including $ 16,637 and $ 16,231 , respectively, held by related parties)

Equipment financing debt, net of current portion

8 unchanged sentences

Common stock, $ 0.001 par value;

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

350,000,000 shares authorized and 26,968,632 shares issued and 26,815,181 outstanding at December 31, 2021;

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

10 unchanged sentences

Dollar amounts in thousands (except per share data)

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

Durable medical equipment sales and services revenue

11 unchanged sentences

Total operating costs and expenses

Operating income (loss)

Operating loss

Dividends and interest income

Net realized and unrealized loss on investment

Net realized and unrealized loss on investments of consolidated funds

Net realized and unrealized (loss) gain on investments

Net realized and unrealized gain on investments of Consolidated Funds

Interest expense

Loss on extinguishment of debt

Other income, net

Income (loss) from continuing operations, before income taxes

Loss from continuing operations, before income taxes

Income tax benefit (expense)

Income (loss) from continuing operations

Loss from continuing operations

Discontinued operations:

Income from discontinued operations, net of tax

Net income (loss)

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

22 unchanged sentences

BALANCE, September 30, 2021

Redemption of interests in Consolidated Funds, net

Issuance of common stock related to vesting of restricted stock

Stock-based compensation

BALANCE, December 31, 2021

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

10 unchanged sentences

BALANCE, September 30, 2020

Issuance of common stock related to vesting of restricted stock

Distributions to non-controlling interest holders of DME, Inc.

Issuance of Forest common stock

Stock-based compensation

BALANCE, December 31, 2020

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

2 unchanged sentences

Dollar amounts in thousands

For the three months ended September 30,

For the six months ended December 31,

Cash flows from operating activities:

Net income (loss)

Net income from discontinued operations

4 unchanged sentences

Purchases of investments by Consolidated Funds

Stock dividends received from GECC

Unrealized loss on investments from consolidated funds

Stock dividends received

Unrealized gain on investments from Consolidated Funds

Realized loss on investments from Consolidated Funds

14 unchanged sentences

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

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

Net cash provided by operating activities-discontinued operations

Net cash provided by (used in) operating activities

3 unchanged sentences

Sales of investments

Participation in related party rights offering

Purchases of equipment held for rental

2 unchanged sentences

Net cash used in investing activities- continuing operations

Net cash used in investing activities- discontinued operations

Net cash used in investing activities

3 unchanged sentences

Dollar amounts in thousands

For the three months ended September 30,

For the six months ended December 31,

Cash flows from financing activities:

3 unchanged sentences

Proceeds from equipment financing debt

Capitalized issuance costs

Due to broker of Consolidated Funds

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

Issuance of Forest preferred stock

Proceeds from sale of Forest common stock, gross

Capital contributions from non-controlling interests in Consolidated Funds

Net cash provided by financing activities- continuing operations

Net cash provided by financing activities- discontinued operations

Net cash used in financing activities- discontinued operations

Net cash provided by financing activities

6 unchanged sentences

Contingent consideration

Distribution of HC LLC preferred stock to non-controlling interest holders of DME Inc.

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

December 31, 2021

Great Elm Group, Inc.

54 unchanged sentences

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.

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 and six months ended December 31, 2020 as discontinued operations.

See Note 4 – Discontinued Operations.

28 unchanged sentences

Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers.

The revenue reserves related to constraints on variable consideration were $ 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.

The revenue reserves related to constraints on variable consideration were $ 1.8 million and $ 2.5 million as of December 31, 2021 and June 30, 2021, respectively.

During the three and six months ended December 31, 2021 and 2020, the Company recognized reductions to revenue of $ 0.8 million and $ 1.8 million, and $ 1.5 million and $ 2.6 million, respectively, related to such constraints.

See Note 3 – Revenue.

1 unchanged sentence

As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known.

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

There were no material adjustments to revenues made in the six months ended December 31, 2021 relating to prior periods.

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

2 unchanged sentences

The Company does not have significant bad debt experience with Payors, and therefore the allowance for doubtful accounts is immaterial.

As of 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.

As of December 31, 2021 and June 30, 2021, the Company had unbilled receivables of approximately $ 0.1 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.

1 unchanged sentence

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

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands except per share amounts)

12 unchanged sentences

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.

As of December 31, 2021, the Company had 12,917,292 potential shares of common stock, including 10,139,031 potential shares of Company common stock issuable upon conversion of Convertible Notes and 2,778,261 potential shares issuable upon the exercise of stock options and vesting of restricted stock units and restricted stock awards, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive.

As of December 31, 2020, the Company had 12,307,863 potential shares of common stock, including 9,008,612 shares of common stock issuable upon the conversion of the Company Convertible Notes and 3,299,251 potential shares issuable upon the exercise of stock options and vesting of restricted stock units and restricted stock awards, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive.

As of December 31, 2021 and 2020, the Company had an aggregate of 153,451 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).

The ability of HC LLC to pay dividends is subject to compliance with the restricted payment covenants under the DME Revolver (as defined below).

Concentration of Risk

3 unchanged sentences

The following table summarizes customer concentrations as a percentage of revenues:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

Government Payor

2 unchanged sentences

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

September 30, 2021

December 31, 2021

June 30, 2021

2 unchanged sentences

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.

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.

1 unchanged sentence

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.

The guidance in ASU 2020-06 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.

The Company adopted ASU 2020-06 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.

12 unchanged sentences

Accumulated deficit

Condensed consolidated statement of operations

For the three months ended

September 30, 2020 As reported (1)

Condensed consolidated statement of

For the three months ended December 31, 2020

As reported ( 1)

ASU 2020-06 Adjustment

September 30, 2020 As adjusted

2020 As adjusted

Non-operating expenses

Interest expense

Net loss from continuing operations

Net loss per share (basic and diluted)

For the six months ended December 31, 2020

As reported ( 1)

ASU 2020-06 Adjustment

2020 As adjusted

Non-operating expenses

Interest expense

Net loss from continuing operations

Net loss per share (basic and diluted)

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

Recently Issued Accounting Standards

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.

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.

1 unchanged sentence

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):

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.

4 unchanged sentences

The revenues from each major source of revenue are summarized in the following table:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

7 unchanged sentences

Total product and services revenue

Rental Revenues

Rental Revenue

Durable Medical Equipment

29 unchanged sentences

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.

There were no material changes in estimates recorded in the three and six months ended December 31, 2021, relating to prior periods.

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

7 unchanged sentences

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.

During the three and six months ended December 31, 2021, we issued recoupments of $ 1.2 million and $ 2.3 million, leaving a remaining balance of $ 1.2 million as of December 31, 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.

The Company has no other contract liabilities as of December 31, 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.

As of December 31, 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

17 unchanged sentences

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.

The incentive fees which have been earned per the terms of the investment management agreements but remain fully constrained as of December 31, 2021 are not yet determinable pending the completion of GECC’s annual financial close and reporting process.

Administration Fees

18 unchanged sentences

Such adjustments are typically identified and recorded at the point of cash application or claim denial.

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

There were no material changes in estimates recorded in the six months ended December 31, 2021, relating to prior periods.

Although invoicing typically occurs at the beginning of the monthly rental period, we recognize revenue from rentals on a daily basis.

Since rental agreements can commence at any time during a given month, we defer revenue related to the remaining monthly rental period as of period end.

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

Deferred revenue related to rentals was $ 1.0 million and $ 1.0 million as of December 31, 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.

As of December 31, 2021 and June 30, 2021, net unbilled rental revenue is approximately $ 0.05 million and $ 0.1 million, respectively, and is included in accounts receivable.

Discontinued Operations

5 unchanged sentences

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,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

43 unchanged sentences

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.

As a result of the acquisition, at December 31, 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.

15 unchanged sentences

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 Company has determined that GEOF, each series of GEOF and GESOF are VIEs and that the criteria for consolidation are met for GEOF Series C, which was launched in November 2020 and subsequently merged into 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.

3 unchanged sentences

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.

As of December 31, 2021 no single issuer or investment of the Consolidated Funds had a fair value greater than 5 % of the Company’s total consolidated assets.

Additionally, the Company receives dividends from its investment in GECC and earns unrealized profits and losses based on the mark-to-market performance of its investment in GECC.

1 unchanged sentence

The following tables summarize activity and outstanding balances between the managed investment products and the Company:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

Net (loss) on investments

Net (loss) on investments of consolidated funds

Net (loss) income on investments

Net (loss) income on investments of Consolidated Funds

Dividend income

(in thousands)

September 30, 2021

December 31, 2021

June 30, 2021

4 unchanged sentences

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.

As of December 31, 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 $ 16.9 million as of December 31, 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.

1 unchanged sentence

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;

Since its inception in November 2016, GECM has operated at a cumulative loss through December 31, 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).

As of December 31, 2021 MAST Capital is the beneficial owner of approximately 7.3 % 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.

3 unchanged sentences

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.

For the three and six months ended December 31, 2021, such costs were $ 0.1 million and $ 0.3 million, respectively.

For the three and six months ended December 31, 2020, such costs were $ 0.1 million and $ 0.1 million.

The Company also granted Restricted Stock Awards to an employee of ICAM with a grant date fair value of $ 0.2 million during the quarter ended December 31, 2021 as additional compensation for consulting services performed under the shared personnel and reimbursement agreement with ICAM.

General Corporate

1 unchanged sentence

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

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

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,

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

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

45 unchanged sentences

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.

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

Fair Value as of December 31, 2021

Equity investments

5 unchanged sentences

Total liabilities

*Balance eliminates in consolidation.

Fair Value as of June 30, 2021

7 unchanged sentences

Total liabilities

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,

*Balance eliminates in consolidation.

There were no transfers between levels of the fair value hierarchy during the six months ended December 31, 2021 and 2020.

The following is a reconciliation of changes in contingent consideration, a Level 3 liability:

For the six months ended December 31,

(in thousands)

10 unchanged sentences

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.

As of December 31, 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.

1 unchanged sentence

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.

The Company had unfunded commitments of $ 0.3 million as of December 31, 2021.

Contingent consideration

2 unchanged sentences

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 %.

The key assumptions in applying the Monte Carlo simulation model as of December 31, 2021 include volatility of 25.2 % 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.

1 unchanged sentence

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 key assumptions in applying the Monte Carlo simulation model as of December 31, 2021 include volatility of 22.8 % and a discount rate of 10.3 %.

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

5 unchanged sentences

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 December 31, 2021 include financial forecasts of the durable medical equipment business and a volatility rate of 46.0 % (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.

The fair value of the embedded derivative as of December 31, 2021 and June 30, 2021, was $ 3.7 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.

3 unchanged sentences

(in thousands)

September 30, 2021

December 31, 2021

June 30, 2021

11 unchanged sentences

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,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

7 unchanged sentences

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

For the three months ended September 30,

For the six months ended December 31,

(in thousands)

4 unchanged sentences

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 December 31, 2021

As of June 30, 2021

9 unchanged sentences

Aggregate Amortization Expense (in thousands)

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

Estimated Future Amortization Expense (in thousands) :

For the nine months ending June 30, 2022

For the six months ending June 30, 2022

For the year ending June 30, 2023

19 unchanged sentences

(in thousands)

September 30, 2021

December 31, 2021

June 30, 2021

17 unchanged sentences

Weighted-average discount rate

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.

As of December 31, 2021, the Company had remaining right of use assets of $ 4.7 million and lease liabilities of $ 5.0 million (consisting of $ 2.0 million in current portion of lease liabilities and $ 3.0 million in lease liabilities, net of current portion on the condensed consolidated balance sheet) related to the leases discussed herein.

Operating lease costs are included in the operating expense associated with the business segment leasing the asset on the statements of operations and are included in cash flows from operating activities on the statements of cash flows.

1 unchanged sentence

Additional details are presented in the following table:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

7 unchanged sentences

(in thousands)

For the nine months ending June 30, 2022

For the six months ending June 30, 2022

For the year ending June 30, 2023

22 unchanged sentences

(in thousands)

September 30, 2021

December 31, 2021

June 30, 2021

3 unchanged sentences

Equipment financing debt, net of current portion

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

The Company incurred interest expense of $ 0.01 million and $ 0.7 million for the three months ended December 31, 2021 and 2020, respectively.

The Company incurred interest expense of $ 0.02 million and $ 1.4 million for the six months ended December 31, 2021 and 2020, respectively.

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

1 unchanged sentence

Principal Due

For the nine months ending June 30, 2022

For the six months ending June 30, 2022

For the year ending June 30, 2023

6 unchanged sentences

Principal payments and interest expense incurred on the Corbel Facility are summarized in the following table:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

2 unchanged sentences

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.

There were no borrowings outstanding under the DME Revolver at December 31, 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 %.

At December 31, 2021 the interest rate was 3.7 %.

Interest is payable monthly in arrears.

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

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

EBITDA levels.

T he obligations under the DME Revolver are non-recourse to the Company.

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.

The 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.

These equipment financing debt agreements are entered into with third 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.

During the six months ended December 31, 2021 and 2020, the Company financed $ 0.0 million and $ 1.6 million, respectively, in inventory and equipment through such financing agreements.

Investment Management

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Note are summarized in the following table:

For the three months ended September 30,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

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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.

As of December 31, 2021 the total principal balance of Convertible Notes outstanding was $ 35.2 million including cumulative interest paid-in-kind.

The convertible notes ( Convertible Notes ) are held by a consortium of investors, including $ 16.6 million issued to certain related parties.

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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.

The Company incurred interest expense of $ 0.4 million and $ 0.9 million, respectively, for the three and six months ended December 31, 2021.

During the three and six months ended December 31, 2020 the company incurred interest expense of $ 0.4 million and $ 0.8 million, respectively, related to the convertible notes, inclusive of non-cash interest related to amortization of discount.

On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded certain benefits made available under the enhanced Coronavirus Aid, Relief, and Economic Security Act, including modifying and extending the Employee Retention Credit ( ERC ).

As modified, the ERC provides eligible employers with less than 500 employees a refundable tax credit against the employer’s share of social security taxes.

The ERC is equal to 70 % of qualified wages paid to employees during calendar 2021 for a maximum credit per employee of $ 7,000 per employee for each calendar quarter through 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.

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 September 30, 2021.

In addition to claiming ERC’s during the prior fiscal year, the Company claimed ERCs of $ 2.4 million during the six months ended December 31, 2021.

Such claimed ERCs not settled prior to the balance sheet date in the amount of $ 0.5 million were settled shortly thereafter and are disclosed within prepaid and other current assets on our consolidated balance sheet.

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 .

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(in thousands)

September 30, 2021

December 31, 2021

June 30, 2021

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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,

For the three months ended December 31,

For the six months ended December 31,

(in thousands)

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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.

As of December 31, 2021, the Company held 73.5 % of the capital in the Consolidated Funds.

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

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Redemption of Preferred Stock

Balance, as of September 30, 2021

Balance, as of December 31, 2021

Series A-1 Preferred Stock

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Forest Preferred Stock

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

There was no preferred stock activity during the six months ended December 31, 2021 or 2020.

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

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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.

In November 2021, the Compensation Committee of the Board of Directors (the Compensation Committee ) in its discretion determined that an aggregate of 580,023 performance shares previously awarded to certain employees had vested.

These restricted stock awards granted had both performance and service requirements in connection with the formation of the investment management business.

The vesting of these awards was 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.

The discretionary vesting of shares, as determined by the Compensation Committee resulted in a charge to stock-based compensation expense of $ 0.6 million during the three and months ended December 31, 2021.

In addition, during the three and six months ended December 31, 2021, the Company granted 100,000 and 204,602 , respectively, service-based restricted stock awards, 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.

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

During the three and six months ended December 31, 2021 the Company granted 7,845 and 140,294 shares of restricted stock units to employees and directors, respectively.

The activity of the Company’s restricted stock awards and restricted stock units for the six months ended December 31, 2021 was as follows:

Restricted Stock Awards and Restricted Stock Units

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Outstanding at June 30, 2021

Outstanding at September 30, 2021

Outstanding at December 31, 2021

Stock Options

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

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

(in thousands)

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Forfeited, cancelled or expired

Outstanding at September 30, 2021

Exercisable at September 30, 2021

Vested and expected to vest as of September 30, 2021

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

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

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

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

Outstanding at December 31, 2021

Exercisable at December 31, 2021

Vested and expected to vest as of December 31, 2021

During the three months ended December 31, 2021 and 2020, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $ 1.1 million and $ 0.3 million, respectively.

During the six months ended December 31, 2021 and 2020, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $ 1.7 million and $ 0.7 million, respectively.

As of December 31, 2021, the Company had unrecognized compensation costs related to all unvested share awards and options totaling $ 1.2 million.

During the three and six months ended December 31, 2021, the Company issued compensation to certain employees in the form of GECC common shares to be settled with GECC shares currently held by the Company.

The total value of GECC shares awarded for the three and six months ended December 31, 2021 was $ 0.1 million and $ 0.9 million, respectively, of which $ 0.2 million vested immediately, and the balance will vest annually pro-rata over a three year period.

Related compensation expense was $ 0.1 million and $ 0.3 million for the three and six months ended December 31, 2021, respectively.

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.

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The following tables illustrate results of operations by segment:

For the three months ended September 30, 2021

For the three months ended December 31, 2021

(in thousands)

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Other income (expense)

Total other expense, net

Total pre-tax income (loss)

For the three months ended December 31, 2020

(in thousands)

Durable Medical Equipment

Investment Management

General Corporate

Intercompany Eliminations ( 1)

Consolidated Total

Total revenue

Operating costs and expenses:

Cost of durable medical equipment sold and services

Cost of durable medical equipment rentals

Depreciation and amortization

Non-cash compensation ( 3)

Transaction costs ( 4)

Other general and administrative

Total operating expenses

Other income (expense):

Interest expense

Other income (expense)

Total other expense, net

Total pre-tax income (loss)

For the six months ended December 31, 2021

(in thousands)

Durable Medical Equipment

Investment Management ( 1)

General Corporate ( 1)

Intercompany Eliminations ( 2)

Consolidated Total

Total revenue

Operating costs and expenses:

Cost of durable medical equipment sold and services

Cost of durable medical equipment rentals

Depreciation and amortization

Non-cash compensation ( 3)

Transaction costs ( 4)

Other selling, general and administrative

Total operating expenses

Other income (expense):

Interest expense

Other income (expense)

Total other income (expense), net

Total pre-tax income (loss)

For the three months ended September 30, 2020

For the six months ended December 31, 2020

(in thousands)

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

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

and receives consulting fees from for those services.

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

is part of the durable medical equipment segment.

The corresponding expense to HC LLC.

and revenue to DME Manager are eliminated in consolidation.

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.

8 unchanged sentences

The following tables illustrate assets by segment:

As of September 30, 2021

As of December 31, 2021

(in thousands)

12 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements