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 December 31, 2021 was approximately $239.2 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.
43
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 and six months ended December 31, 2021, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic. 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, COVID-19 may impact our ability to finance and execute new acquisitions or other business opportunities.
The durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups relative to pre-COVID levels, though the demand for these services and products has increased from prior quarters. More significantly however, and 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. During the quarter ended December 31, 2021, our equipment allotments from key suppliers were not sufficient to keep up with recovering demand, resulting in missed revenue opportunities. The impact of COVID-19 as well as global supply chain challenges continue to evolve and their duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time. However, the Company expects some level of missed revenue opportunities to continue in the near future due to the supply chain challenges noted above.
44
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. We have since transitioned to a hybrid working model to maximize efficiency while managing risk. 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. 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 any existing or new variants of COVID-19 and related supply chain challenges, including their duration and the magnitude of their economic impact, 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 six months ended December 31, 2021, we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 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.
45
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 December 31,
For the six months ended December 31,
2021
Percent Change
2020
2021
Percent Change
2020
Revenue:
Total revenue
$
16,749
9
%
$
15,303
$
33,287
8
%
$
30,686
Operating costs and expenses:
Cost of goods sold
(4,309
)
(8
)%
(4,703
)
(8,369
)
(6
)%
(8,910
)
Cost of rentals
(1,734
)
7
%
(1,621
)
(3,584
)
1
%
(3,536
)
Other selling, general and administrative
(12,019
)
17
%
(10,309
)
(21,084
)
5
%
(20,128
)
Depreciation and amortization
(552
)
(7
)%
(591
)
(1,114
)
(6
)%
(1,181
)
Total operating expenses
(18,614
)
(17,224
)
(34,151
)
(33,755
)
Operating income (loss)
(1,865
)
(1,921
)
(864
)
(3,069
)
Other income (expense):
Interest expense
(1,362
)
24
%
(1,102
)
(2,724
)
21
%
(2,246
)
Other income (expense)
(997
)
(147
)%
2,118
(531
)
(172
)%
742
Total other expense, net
(2,359
)
1,016
(3,255
)
(1,504
)
Total pre-tax income (loss)
$
(4,224
)
$
(905
)
$
(4,119
)
$
(4,573
)
Revenue
Revenues for the three and six months ended December 31, 2021 increased $1.4 million and $2.6 million, respectively, as compared to the corresponding periods in the prior year. The increase is primarily attributable to $1.2 million and $2.1 million increases in durable medical equipment revenues for the corresponding periods. The increase 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, as well as improvements in revenue reserves resulting from investments in the credit and collections process in the prior year. Investment management revenues also increased $0.3 million and $0.5 million related to increases in assets under management as compared to the prior periods.
Operating costs and expenses
Operating costs for the three and six months ended December 31, 2021 increased $1.7 million and $0.7 million, respectively as compared to the corresponding periods in the prior year. This increase was primarily attributable to increases of $0.5 million and $1.2 million in other durable medical equipment costs primarily related to the operations of AMPM and MedOne and related transaction and integration costs, and $1.1 million and $1.6 million in investment management expenses primarily related to increased compensation and consulting costs. The increases during the six months ended December 31, 2021 were partially offset by $2.4 million in Employee Retention Credits claimed during such period under the enhanced Coronavirus Aid, Relief, and Economic Security Act ( CARES Act ). Remaining increases of $0.1 million and $0.3 million for the three and six months ended December 31, 2021, respectively, relate primarily to strategic initiatives.
46
Other income (expense)
Interest expense increased by $0.3 million and $0.5 million, respectively, for the three and six months ended December 31, 2021, as compared to the three and six months ended December 31, 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 December 29, 2020.
Other income (expense) for the three and six months ended December 31, 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. In addition, other income (expense) during the three and six months ended December 31, 2020 includes $1.9 million in losses on the extinguishment of the Corbel Facility.
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 December 31,
For the six months ended December 31,
(in thousands)
2021
Percent Change
2020
2021
Percent Change
2020
Revenue:
Total revenue
$
15,728
8
%
$
14,543
$
31,283
7
%
$
29,153
Operating costs and expenses:
Cost of goods sold
(4,309
)
(8
)%
(4,703
)
(8,369
)
(6
)%
(8,910
)
Cost of rentals
(1,734
)
7
%
(1,621
)
(3,584
)
1
%
(3,536
)
Transaction costs
(127
)
46
%
(87
)
(224
)
157
%
(87
)
Other selling, general and administrative
(8,473
)
6
%
(8,028
)
(14,759
)
(7
)%
(15,799
)
Depreciation and amortization
(443
)
(4
)%
(463
)
(896
)
(3
)%
(925
)
Total operating expenses
(15,086
)
(14,902
)
(27,832
)
(29,257
)
Other income (expense):
Interest expense
(1,289
)
88
%
(687
)
(2,576
)
85
%
(1,396
)
Other income (expense)
1,584
(186
)%
(1,832
)
2,144
(217
)%
(1,836
)
Total other expense, net
295
(2,519
)
(432
)
(3,232
)
Operating income (loss):
Total pre-tax income (loss)
$
937
$
(2,878
)
$
3,019
$
(3,336
)
Durable Medical Equipment Revenue
For the three months ended December 31, 2021, revenues from the sale of medical equipment and sleep study services were $9.0 million and $1.3 million, respectively, while for the three months ended December 31, 2020, such revenues were $8.4 million and $1.1 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 $0.4 million in revenue reserve improvements on sales and services revenue.
47
For the six months ended December 31, 2021, revenues from the sale of medical equipment and sleep study services were $17.7 million and $2.7 million, respectively, while for the six months ended December 31, 2020, such revenues were $16.4 million and $2.4 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 $0.5 million in revenue reserve improvements on sales and services revenue.
For the three months ended December 31, 2021, rental revenue was $5.5 million as compared to $5.0 million for the six months ended December 31, 2020. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021 as well as $0.2 million in revenue reserve improvements on sales and services revenue.
For the six months ended December 31, 2021, rental revenue was $10.9 million as compared to $10.4 million for the six months ended December 31, 2020. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021 as well as $0.3 million in revenue reserve improvements on sales and services revenue.
The results for the three and six months ended December 31, 2021 were hindered by global supply chain issues which significantly restricted our ability to procure CPAP equipment, resulting in lost revenue opportunities during the periods primarily related to CPAP sales and CPAP rentals. We expect these global supply chain issues to persist in the near term but continue to work with key suppliers to minimize the impact to our business.
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 on sales as compared to the prior periods are primarily due to favorable negotiated volume pricing with strategic vendors, as well as $0.4 million and $0.5 million improvements in revenue reserves as compared to the three and six month periods in the prior year. Margins on rentals as compared to the prior periods have remained consistent, as benefits from lower revenue reserves have been mostly offset by vendor surcharges implemented to address increased costs related to ongoing global supply chain issues.
General and administrative expenses consist of employee-related, facility-related, freight and shipping, information technology and other costs. For the three months ended December 31, 2021 and 2020, employee-related costs were $6.1 million and $5.6 million, 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 for the three months ended December 31, 2021 remained consistent as compared to the prior comparative period. Information technology costs were $0.6 million and $0.5 million for the three months ended December 31, 2021 and 2020, respectively, with increases due to the AMPM and MedOne acquisitions. Other costs for the three months ended December 31, 2021 were $1.0 million as compared to $0.7 million in the prior period, primarily related to professional fees. Other costs were benefited in the current period by $0.3 million related to change in fair value of contingent consideration.
For the six months ended December 31, 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 $12.2 million and $10.9 million for the six months ended December 31, 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 and information technology costs for the six months ended December 31, 2021 of $1.6 million and $1.2 million, respectively, increased nominally as compared to $1.5 million and $1.0 million in the comparable period due to added facilities and personnel from AMPM. Freight and shipping costs for the six months ended December 31, 2021 of $0.8 million remained consistent as compared to the prior comparative period. Other costs for the six months ended December 31, 2021 of $1.4 million increased as compared to $1.3 million in the comparable period, primarily due to professional fees. Other costs were benefited in the current period by $0.5 million related to change in fair value of contingent consideration.
48
Transaction costs for the three and six months ended Dec ember 3 1 , 2021 were nominal in the current and corresponding prior period s .
Depreciation and amortization includes the depreciation of fixed assets, excluding depreciation on the equipment held for rental, which is included in the cost of rentals, and amortization of the intangible assets resulting from the acquisition of the durable medical equipment businesses. Depreciation and amortization for the three and six months ended December 31, 2021 and 2020 remained consistent at $0.5 million and $0.9 million, respectively.
Durable Medical Equipment Other Expenses
The increase in interest expense for the three and six months ended December 31, 2021 as compared to the corresponding periods 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 $25.1 million outstanding under the Corbel Facility and DME Revolver (as defined below) during the three and six months ended December 31, 2020.
During the three and six months ended December 31, 2021, the Company recognized a $1.6 million and $2.1 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 is eliminated in consolidation.
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 December 31,
For the six months ended December 31,
(in thousands)
2021
Percent Change
2020
2021
Percent Change
2020
Revenue:
Total revenue
$
1,021
34
%
$
760
$
2,004
31
%
$
1,533
Operating costs and expenses:
Non-cash compensation
(946
)
380
%
(197
)
(1,342
)
243
%
(391
)
Transaction Costs
-
-%
-
-
-%
-
Other general and administrative
(1,068
)
47
%
(727
)
(1,911
)
52
%
(1,259
)
Depreciation and amortization
(108
)
(15
)%
(127
)
(217
)
(15
)%
(255
)
Total operating expenses
(2,122
)
(1,051
)
(3,470
)
(1,905
)
Other income (expense):
Interest expense
(24
)
(4
)%
(25
)
(48
)
(6
)%
(51
)
Other income (expense)
(1,506
)
(138
)%
3,947
(1,257
)
(149
)%
2,570
Total other expense, net
(1,530
)
3,922
(1,305
)
2,519
Operating income (loss):
Total pre-tax income (loss)
$
(2,631
)
$
3,631
$
(2,771
)
$
2,147
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Investment Management Revenue
Investment management revenues include management fees and administrative fees. For the three and six months ended December 31, 2021 management fees were $0.9 million and $1.8 million, respectively, and administrative fees were $0.1 million and $0.2 million, respectively. For the three and six months ended December 31, 2020 management fees were $0.6 million and $1.2 million, respectively, while administration fees were $0.2 million and $0.3 million, respectively. The increase in management fees for the three and six months ended December 31, 2021 as compared to the three and six months ended December 31, 2020 is attributable to increases in the average assets on which such fees are calculated through growth of GECC and our private fund GESOF, which was launched in February 2021.
Investment Management Costs and Expenses
Non-cash compensation was impacted for the three and six months ended December 31, 2021 include $0.6 million in charges upon the final discretionary vesting of 5-year performance awards initially granted in November 2016. In addition, the Non-cash compensation expense includes annual awards granted to the investment team in September 2021, whereas no awards were granted to the investment team in the prior year. Other general and administrative costs consist primarily of professional fees, facilities and other overhead costs, and payroll and related costs, excluding stock-based compensation. The increase in general and administrative costs for the three and six months ended December 31, 2021 of $0.4 million and $0.6 million as compared to the corresponding prior periods, is primarily attributable to an increase in allocated payroll costs, bonus accruals 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 GEOF Series C and GESOF (the Consolidated Funds). Dividend income from GECC for the three months ended December 31, 2021 and 2020 was $0.5 million and $1.3 million, respectively. Dividend income from GECC for the six months ended December 31, 2021 and 2020 was $1.1 million and $1.8 million, respectively.
We recognized net realized and unrealized losses on our investment in GECC and the investments of the Consolidated Funds of $2.0 million and $2.4 million for the three and six months ended December 31, 2021, respectively, as compared to net realized and unrealized gains of $2.6 million and $0.8 million on our investment in GECC and the investments of the Consolidated Funds for the three and six months ended December 31, 2020. We mark-to-market our investment in GECC and underlying investments of consolidated funds by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end.
Interest expense for the three and six months ended December 31, 2021 remained consistent with the three and six months ended December 31, 2020.
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General Corporate
The following table provides the results of our general corporate activities:
For the three months ended December 31,
For the six months ended December 31,
(in thousands)
2021
Percent Change
2020
2021
Percent Change
2020
Revenue:
Total revenue
$
172
282
%
$
45
$
415
205
%
$
136
Operating costs and expenses:
Non-cash compensation
(280
)
218
%
(88
)
(652
)
102
%
(323
)
Transaction costs
(35
)
(85
)%
(229
)
(219
)
(16
)%
(261
)
Other general and administrative
(1,262
)
26
%
(998
)
(2,392
)
12
%
(2,144
)
Depreciation and amortization
(1
)
-%
(1
)
(1
)
-%
(1
)
Total operating expenses
(1,578
)
(1,316
)
(3,264
)
(2,729
)
Other income (expense):
Interest expense
(1,269
)
225
%
(390
)
(2,538
)
218
%
(799
)
Other income (expense)
145
4733
%
3
1,020
12650
%
8
Total other income (expense), net
(1,124
)
(387
)
(1,518
)
(791
)
Operating income (loss):
Total pre-tax income (loss)
$
(2,530
)
$
(1,658
)
$
(4,367
)
$
(3,384
)
General Corporate Revenue
For the three and six months ended December 31, 2021 and 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 and six months ended December 31, 2021, revenue includes $0.2 million and $0.4 million, respectively, in fees earned by DME Manager relating to consulting services provided to our consolidated subsidiary, 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. These costs increased approximately $0.3 million for the three and six months ended December 31, 2021 as compared to prior periods primarily due to increased professional fees related to strategic initiatives. 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 $0.2 million and $0.3 million for the three and six months ended December 31, 2021 as compared to the corresponding periods 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.
Other Income (Expense)
Interest expense for the three and six months ended December 31, 2021 consists primarily of interest on the convertible notes, as well as on Forest Preferred Stock, which was issued in December 2020. The increase of $0.9 million and $1.7 million in the corresponding periods in the prior year is primarily due to the prior year not including interest on the Forest Preferred Stock, as it was not outstanding in the prior period.
51
Other income (expense) during the three and six months ended December 31, 2021 is comprised of intercompany interest income of $ 1 . 2 million and $2.4 million related to Forest's investments in HC LLC preferred stock , and $0. 7 million and $1.0 million in dividends and unrealized gains on our investment in Monomoy Properties, LLC . This amount is partially offset by a $ 1 . 6 million and $2.1 million charge related to changes in the valuation of the embedded derivative. Since the preferred stock was issued in December 2020 and Monomoy interests were purchased in June 2021, there is no corresponding activity in the prior year. Except for Monomoy-related income, this other income has corresponding charges in the durable medical equipment business and such impacts are eliminated in consolidation.
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 provided by operating activities for the six months ended December 31, 2021 were $3.1 million. The net cash inflow was primarily the result of $4.7 million in sales of investments by our Consolidated Funds, $1.8 million in realized and unrealized losses on our investments and non-cash inflows of $7.2 million related to stock-based compensation, depreciation and amortization. These inflows were partially offset by our net loss of $4.1 million, purchases of investments by our Consolidated Funds of $5.1 million, the timing of cash payments and receipts within our operating assets and liabilities, resulting in a $1.5 million use of cash.
Cash flows used in operating activities for the six months ended December 31, 2020 were $1.7 million. The net cash outflow was primarily the result of our net loss of $4.5 million, $3.3 million in purchases of investments made by the Consolidated Funds and $1.4 million of distributions received in stock from the Company’s investment in GECC. These outflows were partially offset by non-cash inflows of $4.4 million related to depreciation and amortization and $1.4 million related to amortization of debt issuance costs.
Cash flows used in investing activities for the six months ended December 31, 2021 were $3.1 million. The net cash outflow primarily consisted of $1.3 million due to acquisition of MedOne, along with $2.6 million of purchases of capital equipment, partially offset by $0.8 million in proceeds from sale of capital equipment and $0.2 million in sales of investments.
Cash flows used in investing activities for the six months ended December 31, 2020 were $11.4 million. The net cash outflow primarily consisted of $8.8 million in purchases of investments related to participation in the GECC non-transferable rights offering in October 2020 and $3.1 million in purchases of equipment to be held for rental. These outflows were partially offset by $0.5 million in proceeds from sales of equipment held for rental.
Cash flows provided by financing activities for the six months ended December 31, 2021 were $0.6 million which primarily consisted of proceeds from equipment financing of $3.0 million and capital contributions to our Consolidated Funds of $0.1 million, partially offset by principle payments of the equipment financing totaling $2.5 million.
Cash flows provided by financing activities for the six months ended December 31, 2020 were $5.6 million which primarily consisted of $37.7 million in gross proceeds from the JPM Transactions and $1.6 million in proceeds from new equipment financing debt. Such inflows were partially offset by principal payments of $31.0 million on our debt, and debt issuance costs of $1.3 million in connection with the JPM Transactions.
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Financial Condition
As of December 31, 2021, we had an unrestricted cash balance of $25.0 million. We also hold 5,484,669 shares of GECC common stock with an estimated fair value of $16.9 million as of December 31, 2021.
We intend to make acquisitions or investments that we believe will result in the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.
Borrowings
As of December 31, 2021, the Company had $35.2 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 December 31, 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 December 31, 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, HC LLC 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 December 31, 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 December 31, 2021.
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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 Dec ember 3 1 , 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 December 31, 2021, the Company had $2.6 million in equipment financing debt outstanding.
Off-Balance Sheet Arrangements
As of December 31, 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.