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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Global Select Market on December 31, 2021, was $
The number of shares of the Registrant’s common stock outstanding as of September 6, 2022 was
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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Item 9C. |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. |
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Item 10. |
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Item 11. |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
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Principal Accountant Fees and Services |
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Item 16 |
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i
Unless the context otherwise requires, “we,” “us,” “our,” the “Company,” “Great Elm,” “GEG” and terms of similar import refer to Great Elm Group, Inc. and/or its subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This report and certain information incorporated herein by reference contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward-looking statements are reasonable, these assumptions and expectations may not prove to be correct, and we may not achieve the financial results or benefits anticipated. These forward-looking statements are not guarantees of actual results. Our actual results may differ materially from those suggested in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation:
These forward-looking statements speak only as of the time of filing of this report and we do not undertake to update or revise them as more information becomes available. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.
1
PART I
Item 1. Business.
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 goal is to build a diversified holding company focused on generating attractive, risk-adjusted returns on investment and long-term value creation. We intend to accomplish this principally through:
As of June 30, 2022, we had approximately $821 million of net operating loss (NOL) carryforwards for Federal income tax purposes. 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 may be carried forward indefinitely.
Our Durable Medical Equipment Business
We launched our durable medical equipment segment in September 2018 by acquiring two durable medical equipment businesses that specialize in the distribution of respiratory care equipment, including positive air pressure (PAP) equipment and supplies, ventilators and oxygen equipment, and provide sleep study services. Since then, we have grown the business organically through investments in scalability as well as inorganically through tuck-in acquisitions.
Our Investment Management Business
We decided to invest in the asset management business because of our assessment of its ability to generate recurring free cash flows, its growth prospects and our Board of Directors’ (our Board) and employees’ industry expertise. GECM, our wholly-owned registered investment adviser subsidiary, is an investment adviser providing investment management services to GECC and Monomoy REIT, our largest investment vehicles, as well as private funds, including the Great Elm SPAC Opportunity Fund, LLC (GESOF), and separate accounts for an institutional investor. The combined assets under management for these entities as of June 30, 2022 was approximately $607.0 million.
GECC was established in 2016 and it elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the Investment Company Act). We own approximately 35.4% of GECC’s shares that we may hold to generate dividends or sell to redeploy our capital in higher yielding opportunities.
Monomoy REIT was formed in 2014 with the purpose of building an industry leading single-tenant industrial portfolio specializing in net leased assets, specifically Class B & C warehouse, distribution & light manufacturing assets. The Company acquired the investment management agreement of Monomoy REIT in May 2022. The Company and its subsidiaries collectively own approximately 10.5% of Monomoy Properties UpREIT, LLC, the operating partnership of Monomoy REIT (Monomoy UpREIT).
GECM earns revenue through investment management agreements with each investment vehicle which provide for management fees, property management fees, incentive fees and/or administrative fees. These fees are generally based on assets under management, rent collected, investment performance and allocable expenses incurred in the administration of these investment vehicles.
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.
2
For additional information see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Holding Company Reorganization
On December 21, 2020, Great Elm Capital Group, Inc. (GEC) announced plans to create a new public holding company, Great Elm Group, Inc. by implementing a non-taxable holding company reorganization (the Holding Company Reorganization). Following the Holding Company Reorganization, the Company became the successor issuer to GEC.
On December 29, 2020, we completed a reorganization of our corporate structure, where GEC changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of GEG. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of our common stock, ticker symbol “GEG”. Forest's common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Holding Company Reorganization was a tax-free transaction for U.S. federal income tax purposes for our shareholders.
Financing Transaction
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 and the Company agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.
In connection with such financing, among other things:
(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).
Subsidiary Reorganization
On May 31, 2021, our wholly-owned subsidiary Great Elm DME Holdings, Inc. exchanged its 80.1% interests in DME Inc. for an identical 80.1% direct interest in DME Inc.’s subsidiary HC LLC, which is the sole owner of the durable medical equipment operating subsidiaries. Following the consummation of the reorganization, we no longer have an interest in DME Inc.
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On June 29, 2021, GP Corp. assigned the rights to a profit sharing agreement with GECM, their intercompany obligation under a senior secured note payable issued by GP Corp. and other assets and liabilities to their wholly-owned subsidiary Great Elm Capital GP, LLC (GEC GP). Subsequent to the assignment, we exchanged our 98.2% interests in GP Corp. for an identical 98.2% direct interest in GP Corp.’s wholly-owned subsidiary GEC GP. Following the consummation of the reorganization, the Company no longer has an interest in GP Corp.
CARES Act Stimulus
During the year ended June 30, 2022 and 2021, the Company and its subsidiaries recognized benefits related to stimulus received under the Coronavirus Aid, Relief, and Economic Security Act initially passed into law on March 27, 2020 and subsequently expanded (CARES Act) of $2.4 million and $4.8 million, respectively, consisting of employee retention payroll tax credits.
Acquisition Program
Great Elm’s team continues to monitor and identify opportunities in the durable medical equipment, investment management and other sectors through the acquisition of operating businesses. In the fiscal year ended June 30, 2022, we evaluated a number of opportunities in these areas.
Competition
We face competition from larger, well financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, private equity funds, sovereign wealth funds and state-owned enterprises. Government regulation is a key competitive factor for certain industries.
Employees
We had 381 employees as of June 30, 2022, including the 360 employees of our durable medical equipment subsidiaries.
Information about Great Elm on the Internet
The following documents and reports are available on or through our website as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC:
The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Our stockholders may also obtain a printed copy of any of the above documents or reports by sending a request to Great Elm Group, Inc., 800 South Street, Suite 230, Waltham, MA 02453; Attention: Investor Relations, or by calling (617) 375-3006. We charge $0.50 per page to cover expenses of copying and mailing.
Our corporate headquarters is located at 800 South Street, Suite 230, Waltham, Massachusetts 02453. Our corporate website address is www.greatelmgroup.com.
The contents of the websites referred to above are not incorporated into this filing.
4
Item 1A. Risk Factors.
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included in this report, before you decide whether to invest in our securities. The following risks are not the only risks we face. If any of the following risks occurs or continues to occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common shares could decline, and you may lose all or part of your investment. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated.
Risks Related to Our Business
We have a limited track record in the durable medical equipment and investment management businesses, and provide no assurance as to our acquisition and investment program. We entered the investment management business in November 2016 and we entered the durable medical equipment business in September 2018. Accordingly, there is limited historical information about our performance.
We have plans to make significant investments and will continue to explore opportunities in these and other sectors but cannot provide specificity as to our future investments or financing plans.
These and other factors, including the other risk factors described in this report, make it difficult for you and other market participants to value our company and our prospects. We are unaware of any comparable company that securities analysts can use to benchmark our performance and valuation. We cannot give any assurance that any of the uncertainties or risk factors in this report will be favorably resolved.
Our growth strategy may not be successful. The process to identify potential investment opportunities and strategic transaction partners, to investigate and evaluate the future returns therefrom and business prospects thereof and negotiate definitive agreements with respect to such transactions on mutually acceptable terms can be time consuming and costly. We are likely to encounter intense competition from other companies with similar business objectives to ours, including private equity and venture capital funds, sovereign wealth funds, special purpose acquisition companies (SPACs), investment firms with significantly greater financial and other resources and operating businesses competing for acquisitions. Many of these companies are well established, well financed and have extensive experience in identifying and effecting business combinations.
The Company continually evaluates its assets and investments relative to other market opportunities in order to maximize shareholder value. As a result, the Company may purchase new assets or businesses or sell existing assets or businesses at any time. If such a purchase or sale is not successfully completed, integrated or managed effectively, or does not result in the benefits or cost savings we expect, our business, financial condition or results of operations may be adversely affected.
Because we will consider investments in different industries, you have no basis at this time to ascertain the merits or risks of any business that we may ultimately invest in or seek to acquire. We are a holding company seeking to acquire assets and businesses. We are not limited to acquisitions and/or investments in any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately invest or the target businesses in which we may ultimately invest or seek to acquire. We may not properly assess all of the significant risks present in that opportunity. Even if we properly assess those risks, some of them may be outside of our control or ability to affect. For example, as part of our investment management business we will direct investments in a wide variety of industries and vehicles, including SPACs, which may decline in value. Except as required under the Nasdaq Stock Market LLC (Nasdaq) rules and applicable law, we will not seek stockholder approval of any investment or acquisition that we may pursue, so you will most likely not be provided with an opportunity to evaluate the specific merits or risks of such a transaction before we become committed to the transaction. Our business, financial condition and results of operations are dependent upon our investments. Any material adverse change in one of our investments or in a particular industry in which we invest may cause material adverse changes to our business, financial condition and results of operations. Further, concentration of capital we devote to a particular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of operations, possibly in a material adverse way.
5
Subsequent to an investment, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our share price, which could cause you to lose some or all of your investment. Even if we conduct extensive due diligence on a target business that we invest in, we cannot assure you that this diligence will identify all material issues that may be present inside a particular target business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the target business or outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in us reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate covenants under our debt agreements. Accordingly, you could suffer a significant reduction in the value of your shares.
We may not correctly assess the management teams of the businesses we invest in. The value of the businesses we invest in is driven by the quality of the leaders of those businesses. When evaluating the desirability of a prospective target business, our ability to assess the target business’ management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of the target’s management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we expected. Should the target’s management not possess the necessary skills, qualifications or abilities, the operations and profitability of that business will be negatively impacted. In addition, we may acquire private, non-public companies, with unsophisticated accounting or compliance operations and personnel.
Our ability to successfully grow our business will be dependent upon the efforts of our key personnel. The loss of key personnel could negatively impact the operations and profitability of our business. Our ability to successfully effect our growth strategy is dependent upon the efforts of our key personnel. The loss of our key personnel could severely negatively impact the operations and profitability of our business.
Increased competition may adversely affect our revenues, profitability and staffing. All aspects of our business are intensely competitive. We will compete directly with a number of BDCs, private equity and venture capital funds, financial investment firms and special purpose acquisition companies. There has been increasing competition from others offering financial services, including services based on technological innovations. Increased competition or an adverse change in our competitive position could lead to a reduction of business and therefore a reduction of revenues and profits.
Competition also extends to the hiring and retention of highly skilled management and employees. A competitor may be successful in hiring away employees, which may result in us losing business formerly serviced by such employees. Competition can also increase our costs of recruiting, hiring and retaining the employees we need to effectively operate our business.
Changing conditions in financial markets and the economy could impact us through decreased revenues, losses or other adverse consequences. Global or regional changes in the financial markets or economic conditions, including supply chain conditions, could adversely affect our business in many ways, including the following:
We may not be able to generate sufficient taxable income to fully realize the tax benefits of our NOL carry forwards, the potential benefits of which would be reduced if U.S. federal income tax rates are lowered. At June 30, 2022, we had NOL carryforwards of approximately $821 million. If we are unable to generate sufficient taxable income prior to the expiration of our U.S. federal NOL carryforwards, the NOL carryforwards would expire unused. Our projections of future taxable income required to fully realize the recorded amount of the gross deferred tax asset reflect numerous assumptions about our operating businesses and investments and are subject to change as conditions change specific to our business units, investments or general economic conditions.
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If our tax filing positions were to be challenged by federal, state and local or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions. We record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial position, cash balances and results of operations.
We may issue notes or other debt securities, or otherwise incur substantial debt, which may adversely affect our leverage and financial condition and thus negatively impact the value of our stockholders’ investment in us. We may choose to incur substantial debt to finance our growth plans. For example, in June 2022, we raised $26.9 million through the issuance of 7.25% Notes due 2027. The incurrence of additional debt could have a variety of negative effects, including:
The financial services industry is subject to extensive regulation, including recent legislation and new or pending regulation, which may significantly affect our business. The financial services industry is subject to extensive laws, rules and regulations. In recent years in particular, there has been significant legislation and increased regulation affecting the financial services industry. These legislative and regulatory initiatives affect us, our competitors, our managed investment products and our customers. These changes could have an effect on our revenue and profitability, limit our ability to pursue business opportunities, impact the value of assets that we hold, require us to change certain business practices, impose additional costs on us, and otherwise adversely affect our business. Accordingly, we cannot provide assurance that legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial condition.
Firms that engage in securities and derivatives trading and wealth and asset management must comply with the laws, rules and regulations imposed by national and state governments and regulatory and self-regulatory bodies with jurisdiction over such activities. Such laws, rules and regulations cover all aspects of the financial services business, including, but not limited to, sales and trading methods, trade practices, use and safekeeping of customers’ funds and securities, capital structure, anti-money laundering and anti-bribery and corruption efforts, recordkeeping and the conduct of directors, officers and employees. Regulators will supervise our business activities to monitor compliance with laws, rules and regulations of the relevant jurisdiction. In addition, if there are instances in which our regulators question our compliance with laws, rules, and regulations, they may investigate the facts and circumstances to determine whether we have complied.
Operational risks may disrupt our business, result in regulatory action against us or limit our growth. Our businesses will be highly dependent on our ability to process, on a daily basis, transactions across numerous and diverse markets and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, a financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.
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Our financial and other data processing systems will rely on access to and the functionality of operating systems maintained by third parties. If the accounting, trading or other data processing systems on which we are dependent are unable to meet increasingly demanding standards for processing and security or if they fail or have other significant shortcomings, we could be adversely affected. Such consequences may include our inability to effect transactions and manage our exposure to risk.
We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. We and our third-party providers are the subject of attempted unauthorized access, computer viruses and malware, and cyber-attacks designed to disrupt or degrade service or cause other damage and denial of service. Cyberattacks and other cyber incidents are occurring more frequently, are constantly evolving in nature, are becoming more sophisticated and are being carried out by groups and individuals (including criminal hackers, hacktivists, state-sponsored actors, criminal and terrorist organizations, individuals or groups participating in organized crime and insiders) with a wide range of expertise and motives (including monetization of corporate, payment or other internal or personal data, theft of computing resources, financial fraud, operational disruption, theft of trade secrets and intellectual property for competitive advantage and leverage for political, social, economic and environmental reasons). Such cyberattacks and cyber incidents can take many forms including cyber extortion, denial of service, social engineering, such as impersonation attempts to fraudulently induce employees or others to disclose information or unwittingly provide access to systems or data, introduction of viruses or malware, such as ransomware through phishing emails, website defacement or theft of passwords and other credentials, unauthorized use of computing resources for digital currency mining and business email compromises. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale. Legal liability arising from such risks may harm our business. Many aspects of our business involve substantial risks of liability.
Our financial and operational controls may not be adequate. As we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties integrating their controls and systems, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.
Losses not covered by insurance may be large, which could adversely impact our financial performance. We carry various insurance policies on our assets. These policies contain policy specifications, limits and deductibles that may mean that such policies do not provide coverage or sufficient coverage against all potential material losses. There are certain types of risk (generally of a catastrophic nature such as war or environmental contamination) which are either uninsurable or not economically insurable. Further, there are certain types of risk for which insurance coverage is not equal to the full replacement cost of the insured assets. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more of our assets or operations.
We also carry directors and officers liability insurance (D&O insurance) for losses or advancement of defense costs in the event a legal action is brought against the company’s directors, officers or employees for alleged wrongful acts in their capacity as directors, officers or employees. Our D&O insurance contains certain customary exclusions that may make it unavailable for the company in the event it is needed; and in any case our D&O insurance may not be adequate to fully protect the company against liability for the conduct of its directors, officers or employees.
Our business is subject to risks arising from epidemic diseases, such as the COVID-19 pandemic. The COVID-19 pandemic was designated as a global pandemic by the World Health Organization in March 2020 and continues to impact economic activity and supply chains in the United States and globally despite robust vaccination rollout efforts by governments and the medical community. The COVID-19 pandemic, or other public health epidemic or pandemic, poses the risk that we or our employees, contractors, suppliers, portfolio companies and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. The continued spread of COVID-19 and the measures taken by local governments to date has had a significant impact on our practitioner orders for sleep studies and durable medical equipment set-ups, though we have observed recovery in demand during the current year. More recently however, the COVID-19 pandemic has impacted global supply chains, limiting our ability to procure sufficient durable medical devices to meet existing demand. The duration of this disruption remains uncertain. However, if it were to continue for an extended period of time, it could adversely impact our business, financial condition or results of operations, or impact the recoverability of our long-lived assets.
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Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments. As a result, we may experience additional losses on our investments in GECC stock. Decreases in the market values of investments held within GECC’s portfolio companies could also lead to decreases in asset-based fee revenues within the investment management business.
The COVID-19 pandemic and mitigation measures have and may continue to have an adverse impact on global economic conditions which could have an adverse effect on our business, financial condition, result of operations, and the recovery of our long-lived assets, as well as our ability to obtain third-party financing for potential acquisitions on terms acceptable to us, if at all. The extent to which the COVID-19 pandemic impacts our results and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including the success of continued vaccination rollouts and the potential emergence of new virus strains.
Risks Related to Our Durable Medical Equipment Business
Adverse trends in the healthcare industry may negatively affect our investment in HC LLC, a supplier of durable medical equipment and services. The healthcare industry is currently experiencing, among other things:
These factors may negatively impact the economic performance of HC LLC, which may have a material adverse effect on our business and financial condition.
A significant portion of HC LLC’s patients who rent and use its products have health coverage under the Medicare program, and future changes in the reimbursement rates or payment methodologies under Medicare and other government programs may adversely affect the financial condition of HC LLC, which could materially and adversely affect our business and operating results. As a provider of respiratory-related product rentals, a portion of HC LLC’s revenue comes from Medicare reimbursement, due in part to a higher proportion of elderly persons suffering from chronic respiratory conditions than in the general population. There are increasing pressures on Medicare to control healthcare costs and to reduce or limit reimbursement rates for home medical products.
Legislation, including the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the Deficit Reduction Act of 2005, the Medicare Improvements for Patients and Providers Act of 2008, the ACA, the 21st Century Cures Act and the CARES Act contain provisions that directly impact reimbursement for the durable medical equipment products supplied by HC LLC. These legislative provisions as currently in effect and any changes to such provisions in the future will continue to have a material effect on HC LLC’s business, financial condition and operating results.
Further, due to budgetary shortfalls, many states are considering, or have enacted, cuts to their Medicaid programs. These cuts have included, or may include, elimination or reduction of coverage for HC LLC’s products, amounts eligible for payment under co-insurance arrangements, or reimbursement rates for covered items. Continued state budgetary pressures could lead to further reductions in funding for the reimbursement for HC LLC’s products which, in turn, would adversely affect its, and ultimately our, business, financial condition and results of operations.
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The competitive bidding process under Medicare could adversely impact the business and financial condition of HC LLC. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires the Secretary of Health and Human Services to establish and implement programs under which competitive bid areas (CBAs)are established throughout the U.S. for purposes of awarding contracts for the furnishing of competitively priced items of durable medical equipment. The Centers for Medicare and Medicaid Services (CMS), the agency responsible for administering this Medicare program, conducts a competition for each competitive acquisition area under which suppliers submit bids to supply certain covered items of durable medical equipment. Successful bidders must meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the CBAs. There are, however, regulations in place that allow non-contracted suppliers to continue to provide products and services to their existing customers at the new competitive bidding payment amounts. The contracts are generally expected to be re-bid every three years.
CMS suspended its competitive bidding process last year and existing contracts expired on December 31, 2018. As of January 1, 2019, there is a temporary gap in the competitive bidding program. The Company submitted bids for the 2021 competitive bidding program in September 2019. However, in October 2020 CMS announced that relevant product categories had been removed from the 2021 competitive bidding program as resulting prices did not achieve expected savings. According to guidance from CMS, the next competitive bidding round is anticipated to begin on January 1, 2024.
We continue to monitor developments regarding the implementation of this competitive bidding program, but we are currently unable to predict the future outcome of the competitive bidding program on HC LLC once it recommences. It is likely that reimbursement rates will continue to fluctuate, thus resulting in payment adjustments which could adversely affect the financial conditions and results of operations of HC LLC.
HC LLC obtains some of the components, subassemblies and completed products included in its sleep and respiratory-focused durable medical equipment from a single source or a limited group of manufacturers or suppliers, and the partial or complete loss of one of these manufacturers or suppliers could cause significant production delays, an inability to meet customer demand and a substantial loss in revenue. HC LLC utilizes single-source suppliers for some of the components and subassemblies it uses in its sleep and respiratory-focused durable medical equipment. HC LLC’s use of single-source suppliers for some components of its durable medical equipment may expose it to several risks, including, among other things:
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HC LLC may experience problems with some of its suppliers in the future. It may not be able to quickly establish additional or replacement suppliers, particularly for single source components or subassemblies. Any interruption or delay in the supply of components or subassemblies, or HC LLC’s inability to obtain components or subassemblies from alternate sources at acceptable prices in a timely manner, could impair its ability to meet the demand of its customers and cause them to cancel orders or switch to competitive products, potentially resulting in a loss of revenues.
On June 14, 2021 the Company received notice from Philips Respironics, a key supplier, that certain positive air pressure equipment and ventilator devices that we distribute and sell would be included in a voluntary recall. The recall was initiated by Philips Respironics due to potential health risks to patients involving the polyester-based polyurethane sound abatement foam used in the recalled devices. Based on testing performed by Philips Respironics, this foam may degrade into particles which may enter the device’s air pathway and be ingested or inhaled by the user, and the foam may off-gas certain chemicals leading to potential health risks. Patients using these devices have been instructed to talk with their health care provider regarding the most appropriate options for treatment for their condition in light of this recall. Since June 14, 2021, the Company has worked with affected patients to register their device on the Philips Respironics’ recall website.
The Company cannot predict the potential legal, regulatory, and financial risks that may arise out of the recall. It is possible that some patients will discontinue use of their device, which could affect the Company’s ability to continue billing for service. Furthermore, the Company may be subject to future litigation related to the recall, including but not limited to claims related to personal injury for devices affected by the recall. The Company cannot predict what additional actions will be required of the Company by the Food and Drug Administration or other state or federal agencies related to the recall.
Philips Respironics produces alternative ventilator devices that are not affected by the recall and became available for purchase beginning in April 2022. Although Philips Respironics also produces alternative positive air pressure equipment that are not affected by the recall, such equipment is not currently available for purchase as all such units are being deployed to replace recalled equipment. As a significant supplier in the space, the recall has led to observed supply chain constraints for such devices.
In addition, the global supply chain shortages in semiconductor microchips has impacted the manufacturing capacity of other key suppliers, further limiting our ability to procure sufficient positive air pressure equipment to meet patient demand during the year and resulting in lost revenue opportunities. The Company cannot predict the duration and severity of these supply chain issues, however a prolonged shortage could significantly affect the Company’s ability to service all patient demand for these devices and materially and adversely affect the Company’s business and results of operations.
HC LLC depends upon reimbursement from Medicare, private payors, Medicaid and patients for a significant portion of its revenue, and if it fails to manage the complex and lengthy reimbursement process, its business and operating results could suffer. A significant portion of HC LLC’s rental revenue is derived from reimbursement by third-party payors. HC LLC accepts assignment of insurance benefits from customers and, in a majority of cases, invoices and collects payments directly from Medicare, private insurance companies and Medicaid, as well as direct from patients under co-insurance provisions.
HC LLC’s financial condition and results of operations may be affected by the healthcare industry’s reimbursement process, which is complex and can involve lengthy delays between the time that a product is delivered to the consumer and the time that the reimbursement amounts are settled. Depending on the payor, HC LLC may be required to obtain certain payor-specific documentation from physicians and other healthcare providers before submitting claims for reimbursement. Certain payors have filing deadlines and they will not pay claims submitted after such time. HC LLC is also subject to extensive pre-payment and post-payment audits by governmental and private payors that could result in material delays, underpayments of negotiated amounts, refunds of monies received or denials of claims submitted for payment under such third-party payor programs and contracts. We cannot ensure that HC LLC will be able to continue to effectively manage the reimbursement process and collect payments for its products promptly. If it fails to manage the complex and lengthy reimbursement process, it could adversely affect HC LLC’s business, financial conditions and results of operations.
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During the year ended June 30, 2020, we applied for and received $4.4 million in advanced payments from the CMS under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic through disruption in claims submission and claims processing. This CMS program has been modified through the CARES Act to provide additional flexibilities, including extending repayment timeframes and repayment amounts. On October 1, 2020, the Continuing Appropriations Act, 2021 and Other Extensions Act further amended the repayment terms for all providers and suppliers who requested and received accelerated and advance payment(s) during the COVID-19 pandemic by further extending the repayment deadlines and reducing the amount of Medicare payments subject to recoupment. During the years ended June 30, 2022 and 2021, $4.1 million of these advanced payments were recouped by CMS, leaving a remaining balance of $0.3 million. If HC LLS is unable to repay the total amount of the accelerated or advance payment during this extended time-period, CMS may issue demand letters requiring repayment of any outstanding balance, subject to an interest rate of four percent consistent with the terms of the Continuing Appropriations Act, 2021.
If HC LLC fails to comply with state and federal fraud and abuse laws, including anti-kickback, physician self-referral (Stark), false claims and anti-inducement laws, it, and we, could face substantial penalties and HC LLC’s business, operations, and financial condition could be adversely affected. The federal anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federal healthcare programs. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution, the exceptions and safe harbors are drawn narrowly, and any remuneration to or from a prescriber or purchaser of healthcare products or services may be subject to scrutiny if it does not qualify for an exception or safe harbor. HC LLC’s practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Failure to meet all requirements of a safe harbor is not determinative of a kickback issue but could subject the practice to increased scrutiny by the government.
The “Stark Law” prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” which includes durable medical equipment, if the physician or immediate family member of the physician has an ownership or investment interest in or compensation arrangement with such entity that does not comply with the requirements of a Stark exception. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a non-compliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. Although we believe that HC LLC has structured its provider arrangements to comply with current Stark Law requirements, these arrangements may not expressly meet the requirements for applicable exceptions from the law.
Federal false claims laws prohibit any person from knowingly presenting or causing to be presented a false claim for payment to the federal government, or knowingly making or causing to be made a false statement to get a false claim paid. The majority of states also have statutes or regulations similar to the federal anti-kickback and self-referral laws and false claims laws, which apply to items or services, reimbursed under Medicaid and other state programs, or, in several states, apply regardless of payor. These false claims statutes allow any person to bring suit in the name of the government alleging false and fraudulent claims presented to or paid by the government (or other violations of the statutes) and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in the healthcare industry in recent years. Sanctions under these federal and state laws may include civil monetary penalties, damages, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment. In addition, the recently enacted ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Because of the breadth of these laws and the narrowness of the safe harbors and exceptions, it is possible that some of HC LLC’s business activities could be subject to challenge under one or more of such laws. Such a challenge, regardless of the outcome, could have a material adverse effect on its business, business relationships, reputation, financial condition and results of operations.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Certain states mandate implementation of compliance programs and/or the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or more of the requirements.
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The federal Civil Monetary Penalties Law prohibits the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental healthcare program. While it is HC LLC’s intent to comply with all applicable laws, the government may find that HC LLC’s marketing activities violate the Civil Monetary Penalties Law. If it is found to be in non-compliance, HC LLC could be subject to civil money penalties of up to $0.01 million for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the federal or state healthcare programs.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. If HC LLC’s operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, it, and potentially we, may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restricting of HC LLC’s operations. Any penalties, damages, fines, curtailment or restructuring of HC LLC’s operations could harm its ability to operate its business, and ultimately our financial results. Any action against HC LLC for violation of these laws, even if successfully defended against, could cause HC LLC to incur significant legal expenses and divert its management’s attention from operation of its business. Moreover, achieving and sustaining compliance with applicable federal and state fraud and abuse laws may prove costly.
Risks Related to Our Investment Management Business
Our investment management agreements may be terminated. The investment management agreements (IMAs) we have through GECM with various pooled investment vehicles, such as GECC and Monomoy REIT, may be cancelled at the applicable counterparty’s discretion upon certain notice or upon the occurrence of certain events. We do not control the boards of directors of such pooled investment vehicles, and they may cancel our respective IMAs at their discretion without making any termination payment to us. GECM’s investment performance is a key element of retaining this business. We have recorded an intangible asset attributable to the IMAs that is being amortized over a 15-year economic life even though the IMAs are cancellable by the respective counterparties.
Difficult or changing market conditions can adversely affect our investment management business in many ways, by reducing the value or performance of our funds (including our invested funds and funds invested by third parties) or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our income and cash flow and adversely affect our financial condition. The build-out of our investment management business is affected by conditions in the financial markets and economic conditions and events throughout the world, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws and regulations, market perceptions and other factors.
Adverse changes could lead to a reduction in investment income, losses on our own capital invested and lower revenues from investment management fees. Such adverse changes may also lead to a decrease in new capital raised and may cause investors to withdraw their investments and commitments. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce investment management revenues and assets under management and result in reputational damage that may make it more difficult to attract new investors or retain existing investors.
In July 2017, the Financial Conduct Authority (FCA) of the United Kingdom, which regulates the London Interbank Offered Rate (LIBOR), announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after December 31, 2021. LIBOR is not expected to be phased out entirely until 2023, and it is unclear whether new methods of calculating LIBOR will be established in the interim. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee (the ARRC), is considering replacing U.S. dollar LIBOR with a newly created index (the secured overnight financing rate, or SOFR), calculated based on repurchase agreements backed by treasury securities. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. To the extent these interest rates increase, interest expense will increase. If sources of capital for us are reduced, capital costs could increase materially. Restricted access to capital markets and/or increased borrowing costs could have an adverse efect on our results of operations, cash flows, financial condition and liquidity.
Regulators, industry groups and certain committees (e.g., the ARRC) have published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., SOFR as the recommended alternative to U.S. dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. However, at this time, it is not possible to predict whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve and what the effect of their implementation may be on the markets for floating-rate financial instruments.
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Funds managed by GECM, our wholly-owned subsidiary, are party to, and derive income from, other agreements that expressly provide for alternative reference rates and spread adjustments to be used in the event that LIBOR ceases to be published. Despite those provisions, the impact on such agreements of LIBOR no longer being available cannot be entirely predicted at this time. Nor can a seamless transition of such agreements from LIBOR to those alternative reference rates be guaranteed. For example, no assurance can be given that the relevant parties to such agreements will satisfy their contractual obligations to transition to alternative reference rates once LIBOR is no longer available. In addition, the alternative reference rates and spread adjustments used in such agreements could result in a net-effective interest rate that is higher or lower than that which would result from the parties’ use of LIBOR. The alternative reference rates also may be more or less volatile than LIBOR is prior to its discontinuance, which could result in an increase in the cost of our indebtedness, impact our ability to refinance some or all of our existing indebtedness, reduce income generated from assets currently referencing LIBOR, or otherwise have a material adverse impact on our business, financial condition and operations. There also can be no assurance that LIBOR transition-related legislation in the United States or abroad will not adversely impact us by, for example, materially altering, disrupting, impairing, modifying or changing the terms of any LIBOR-linked agreements to which we are a party or beneficiary.
As a result of the foregoing, we may need to renegotiate outstanding loans to our funds and their portfolio companies and that utilize LIBOR as a factor in determining the interest rate, to replace LIBOR with the new standard that is established. The situation continues to evolve and currently there is no definitive information regarding any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined. The effect on our investments will vary depending, among other things, on (1) whether fallback or termination provisions in individual contracts currently exist, and if so, the terms of such provisions and (2) whether, how, and when industry participants develop and adopt new reference rates and fallbacks for both legacy and new investments. We may have discretion to determine a successor or substitute reference rate, including any price or other adjustments to account for differences between the successor or substitute reference rate and previous rate. Such successor or substitute reference rate and any adjustments selected may negatively impact the income of our investments and may expose such investments to additional tax, accounting and regulatory risks. The elimination of LIBOR may affect the value, liquidity or return on our investments and may result in costs incurred in connection with closing out positions and entering into new investments, adversely impacting our overall financial condition or results of operations. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on our businesses and investments until new reference rates and fallbacks for both legacy and new products, instruments and contracts are commercially accepted.
If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to execute our growth plans. If we are deemed to be an investment company under the Investment Company Act, we will be subject to additional regulatory requirements and our activities may be restricted, including:
Each of these may make it difficult for us to run our business. In addition, the law may impose upon us burdensome requirements, including:
In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of securities and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Though we do not believe that our principal activities will subject us to the Investment Company Act, if we were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expense and attention from management for which we have not accounted.
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Our officers and directors may become aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity prior to its presentation to us, subject to their fiduciary duties under applicable law.
We may engage in a business combination with one or more target businesses that have relationships with our executive officers, directors or existing holders which may raise potential conflicts of interest. In light of the involvement of our executive officers and directors with other entities in the investment management business and otherwise, we may decide to acquire or do business with one or more businesses affiliated with our executive officers, directors or existing shareholders.
Our directors also serve as officers and board members for other entities. Such entities may compete with us. We could pursue an affiliate transaction if we determined that such affiliated entity met our criteria for a business combination and such transaction was approved by a majority of our disinterested directors. Potential conflicts of interest may exist, and, as a result, the terms of the business combination may not be as advantageous to our public stockholders as they would be absent any conflicts of interest.
Risks Relating to Our Common Stock
Our common stock is subject to transfer restrictions. We have significant NOL carryforwards and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our amended and restated certificate of incorporation (our certificate of incorporation) contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 4.99% or more of our common stock and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common shares. The restriction will remain until the earliest of (1) the repeal of Section 382 of the Internal Revenue Code of 1986, as amended or any successor statute if our Board determines that the restriction on transfer is no longer necessary or desirable for the preservation of tax benefits, (2) the close of business on the first day of a taxable year as to which our Board determines that no tax benefits may be carried forward, (3) such date as our Board may fix for expiration of transfer restrictions and (4) January 29, 2028. The restriction may be waived by our Board on a case-by-case basis. You are advised to carefully monitor your ownership of our common shares and consult your own legal advisors to determine whether your ownership of our common shares approaches the proscribed level.
We also have a Tax Rights Plan that would be triggered if any person acquires 4.99% or more of our common stock without prior approval by our Board. Holders of more than 4.99% of our common stock on the day the rights plan was adopted were exempted from this limitation as to the number shares they held at the time of adoption of the rights plan.
We may issue additional shares of common stock or shares of our preferred stock to obtain additional financial resources, as acquisition currency or under employee incentive plans. Any such issuances would dilute the interest of our stockholders and likely present other risks. Our certificate of incorporation authorizes our Board to issue shares of our common stock or preferred stock from time to time in their business judgement up to the amount of our then authorized capitalization. We may issue a substantial number of additional shares of our common stock and may issue shares of our preferred stock. These issuances:
Anti-takeover provisions contained in our certificate of incorporation and amended and restated bylaws (our bylaws), as well as provisions of Delaware law, could impair a takeover attempt. Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board. Our corporate governance documents include provisions:
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These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Our common stockholders may experience significant dilution upon the issuance of common stock upon conversion of 5.0% Convertible Senior Payment-In-Kind Notes due 2030 (The Convertible Notes). The issuance of common stock upon conversion of some or all of the Convertible Notes will dilute the ownership interests of existing holders of shares of our common stock, which could cause the price of our common stock to decline. Furthermore, the number of shares of common stock to be issued upon conversion of the Convertible Notes may be substantially greater if the conversion rate is adjusted in accordance with the terms of the Convertible Notes. Holders of the Convertible Notes have the right to convert all or any portion of such notes at any time prior to February 22, 2030 into shares of our common stock at a conversion price of $3.4722 per share. 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. We cannot predict or accurately forecast the total amount of shares of common stock that ultimately may be issued under the Convertible Notes. Further, the perception of these sales or issuances, or the conversion of the Convertible Notes, could impair our ability to raise additional capital through the sale of our equity securities.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We currently lease office space for our principal executive offices in Waltham, Massachusetts, where our general corporate and investment management businesses operate. Our lease is non-cancellable through September 2024.
Investment Management Business
We lease additional office space for our investment management business in Charleston, South Carolina, which has a lease expiration date in October 2024.
Durable Medical Equipment Business
We lease 22 offices and 15 sleep labs for our durable medical equipment businesses. These facilities have various expiration dates between 2022 and 2027. Certain office locations may also include warehouse and retail sales space. The facilities are primarily located in Arizona, Alaska, Iowa, Kansas, Missouri, Nebraska, Oregon and Washington.
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Item 3. Legal Proceedings.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the trading symbol “GEG”.
Record Holders
As of September 6, 2022, there were 60 record holders of our common stock.
Dividends
We do not currently intend to pay dividends on our common stock. The payment of dividends in the future is subject to the discretion of our Board and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that our Board may deem to be relevant.
Restrictions on Ownership
We have significant NOL carryforwards and other tax attributes, the amount and availability of which are subject to qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of the outstanding shares of common stock and the ability of persons or entities now owning 5% or more of the outstanding shares of common stock from acquiring additional common shares. We also have a tax benefits preservation rights plan that restricts ownership of 4.99% or more of our outstanding shares of common stock. Persons that owned more than 4.99% of our common stock when the rights plan was adopted were grandfathered as to their then-current holdings of our common stock. Our Board has granted limited waivers to certain investors to own more than 4.9% of our common stock, including funds managed by Northern Right Capital Management, L.P. (Northern Right) and Imperial Capital Asset Management, LLC (ICAM). As of September 6, 2022, Northern Right and its affiliates and ICAM and its affiliates own approximately 12.0% and 17.6%, respectively, of the outstanding shares of our common stock. Ownership information is based on information in publicly available filings.
Stock Purchases
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations is a supplement to, and should be read in conjunction with, and is qualified entirely by, our consolidated financial statements (including Notes to the Consolidated Financial Statements) and the other consolidated financial information appearing elsewhere in this report. Some of the information in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. Actual results and timing of events could differ from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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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.
For additional information see “Item 1. Business.”
COVID-19
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.
At our durable medical equipment business, the impacts of COVID-19 resulted in suppressed referral pipelines for sleep studies and durable medical equipment set-ups relative to pre-COVID levels. Although we have observed a recovery in demand for these services and products during the current year, global supply chain challenges have impacted our ability to procure sufficient volumes of PAP devices in accordance with our normal procurement process to meet patient demand during the year ended June 30, 2022. Our equipment allotments from key suppliers has resulted in a patient backlog, 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 continually developing supply chain challenges noted above.
Critical Accounting Policies and Estimates
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 accounting principles generally accepted in the United States (US GAAP). 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.
Asset Acquisitions and Business Combinations, Acquired Intangible Assets and Goodwill
Asset acquisitions are accounted for using the cost accumulation method while business combinations are accounted for at fair value. Determining whether the acquired set represents an asset acquisition or a business combination requires quantitative and qualitative assessments that require judgment. If determined to be a business combination, the accounting requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets and liabilities acquired. Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized. Instead, goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors, and long-term growth expectations. The Company utilizes third-party specialists to assist management with the identification and valuation of intangible assets using customary valuation procedures and techniques.
We perform our annual impairment test of goodwill on the first day of the fiscal fourth quarter. The Company tests long-lived assets, including intangible assets, for impairment if conditions exist that indicate the carrying value may not be recoverable.
All of the Company’s goodwill was acquired in conjunction with the acquisitions of the durable medical equipment businesses and has been recorded within our durable medical equipment reporting unit. Based on our annual impairment test as of April 1, 2022 the fair value of the durable medical equipment reporting unit exceeded the carrying value by 34.3% and no impairment occurred. The fair value of this reporting unit was derived using a combination of present value of estimated cash flows and the valuations and prices of comparable businesses. The discount rate used in this analysis was 13.0%.
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Accounts Receivable
Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the patient customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors), based on the contractual agreements. The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers. Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected. The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers. Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers.
The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. Changes in constraints on variable consideration are recorded as a component of net revenues. To the extent historical experience is not indicative of future performance, actual collections experience could differ significantly from management’s judgments and expectations, resulting in either increases or decreases to future revenues, as applicable.
The Company generally does not allow returns from providers for reasons not covered under the manufacturer’s standard warranty. Therefore, there is no provision for sales return reserves. The Company does not have significant bad debt experience with Payors, and therefore does not maintain an allowance for doubtful accounts.
Durable Medical Equipment Revenue
Durable medical equipment revenue from a customer consists of any combination of the sale and rental of durable medical equipment and/or the provision of sleep study services. For durable medical equipment sales and services, the Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. For revenue associated with durable medical equipment rentals, the Company recognizes revenue in accordance with ASC Topic 842, Leases.
The Company sells durable medical equipment, replacement parts and supplies to customers and recognizes revenue at the point control is transferred through delivery to the customer. Each piece of equipment, part or supply is distinct and separately priced; thus they each represent a single performance obligation. The revenue is allocated amongst the performance obligations based upon the relative standalone selling price method, however, items are typically all delivered or supplied together. The customer and, if applicable, the Payors are generally charged at the time that the product is sold, although separate layers of insurance coverage may need to be invoiced before final billings may occur.
The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met.
The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis. The customer has the right to cancel the lease at any time during the rental period and payments are generally billed in advance on a month-to-month basis.
Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility. For durable medical equipment sales and services revenue, the Company includes in the transaction price only the amount that the Company expects to be entitled. Durable medical equipment rental revenue is recognized for amounts where collection from Payors and patients are reasonably assured. As such, revenue recognized upon satisfaction of the Company’s performance obligations consist of substantially all of the Payor billings at contractual rates as well as estimates of patient co-payments that will ultimately be collected.
Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. To the extent historical experience is not indicative of future performance, actual collections experience could differ significantly from management’s judgments and expectations, resulting in either increases or decreases to future durable medical equipment sales and services revenues or durable medical equipment rental income, as applicable.
19
Investment Management Revenue
The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer. Investment management revenue primarily consists of fees based on a percentage of assets under management; fees based on rents collected; fees based on the performance of managed assets; and administrative fees.
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 June 30, 2022, the Company had no cumulative earned but constrained incentive fee revenue.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Valuation allowances are established when necessary in order to reduce deferred tax assets to the amounts expected to be recovered.
The Company has established a full valuation allowance for its deferred tax assets that are not recoverable from taxable temporary differences due to historical net operating losses. To the extent that the Company generates taxable income in the future, the reversal of valuation allowances could generate significant tax benefits to future operations. As of June 30, 2022, the Company has a valuation allowance of $207.1 million.
The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations in several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company records estimated reserves for exposures associated with positions that it takes on its income tax returns that do not meet the more likely than not standards.
Results of Operations
The following discussion is reflective of our two business operating segments: durable medical equipment and investment management. General corporate represents unallocated costs and activity to arrive at consolidated operations. Activity not allocated to the segments include, but are not limited to, certain passive investment and corporate financing activities, professional fees, costs associated with being a public company, acquisition costs and costs associated with executive and corporate management departments, including compensation, benefits, rent and insurance. During the fiscal year ended June 30, 2021 we sold our real estate business. See “Discontinued Operations” above for more information.
The following table provides the results of our consolidated operations:
|
|
For the years ended June 30, |
|
|||||||
|
|
2022 |
|
|
Percent Change |
|
2021 |
|
||
Revenue: |
|
|
|
|
|
|
|
|
||
Total revenue |
|
$ |
67,974 |
|
|
12% |
|
$ |
60,853 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
||
Cost of goods sold |
|
|
(16,795 |
) |
|
(1)% |
|
|
(16,881 |
) |
Cost of rentals |
|
|
(7,149 |
) |
|
3% |
|
|
(6,950 |
) |
Other selling, general and administrative |
|
|
(45,876 |
) |
|
20% |
|
|
(38,376 |
) |
Depreciation and amortization |
|
|
(2,261 |
) |
|
(5)% |
|
|
(2,383 |
) |
Total operating expenses |
|
|
(72,081 |
) |
|
|
|
|
(64,590 |
) |
Operating loss |
|
|
(4,107 |
) |
|
|
|
|
(3,737 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
(5,786 |
) |
|
17% |
|
|
(4,949 |
) |
Other income (expense) |
|
|
(5,123 |
) |
|
NM |
|
|
1,842 |
|
Total other expense, net |
|
|
(10,909 |
) |
|
|
|
|
(3,107 |
) |
Total pre-tax loss from continuing operations |
|
$ |
(15,016 |
) |
|
|
|
$ |
(6,844 |
) |
NM - not meaningful
20
Revenues
Revenues for the year ended June 30, 2022 included $63.5 million from the durable medical equipment business and $4.5 million from the investment management business, while revenues for the year ended June 30, 2021 included $57.6 million from the durable medical equipment business and $3.2 million from the investment management business. The increase in total revenue for the year ended June 30, 2022 as compared to the year ended June 30, 2021 is primarily attributable to contributions from the acquisition 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 years. Investment management revenues also increased $1.4 million related to increases in assets under management at GECC as compared to the prior periods as well as contributions from the acquisition of the Monomoy REIT management agreement in May 2022.
Operating costs and expenses
The increase in operating expenses of $7.6 million for the year ended June 30, 2022 as compared to the year ended June 30, 2021 consists of increases of $1.8 million at our durable medical equipment business related to the operations of AMPM and MedOne and related transaction and integration costs, as well as increases of $3.4 million at our investment management business related to increased consulting costs on our managed products and the workforce acquired to manage the Monomoy REIT. In addition, the year ended June 30, 2022 includes $2.4 million in Employee Retention Credits (ERCs) claimed during such period under the enhanced CARES Act, primarily at our durable medical equipment business. This compares to $4.8 million in ERCs claimed during the year ended June 30, 2021.
Other income (expense)
Interest expense increased $0.8 million for the year ended June 30, 2022 as compared to the year ended June 30, 2021 due primarily to current period interest on the $35.8 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 a term loan which had $24.8 million in principal outstanding on December 29, 2020 and paid down outstanding balances on our revolving credit facility of $0.3 million. Additionally, $0.2 million of the increase relates to recently issued GEGGL Notes and Seller Note (both issued in May 2022 and defined below under "Borrowings").
Other income (expense) typically consists of dividend income and net unrealized gain (loss) on investments. The year over year net increase is primarily attributable to the net realized and unrealized gains and losses on our investment in GECC and private funds which is discussed under “—Investment Management” below. In addition, the Company recognized approximately $0.2 million in losses on extinguishment of redeemable preferred stock during the year ended June 30, 2022, as compared to a loss of $1.9 million on extinguishment of the Corbel Facility during the year ended June 30, 2021.
21
Durable Medical Equipment
The key metrics of our durable medical equipment business include:
The following table provides the results of our durable medical equipment business:
|
|
For the years ended June 30, |
|
|||||||
(in thousands) |
|
2022 |
|
|
Percent Change |
|
2021 |
|
||
Revenue: |
|
|
|
|
|
|
|
|
||
Total revenue |
|
$ |
63,458 |
|
|
10% |
|
$ |
57,643 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
||
Cost of goods sold |
|
|
(16,795 |
) |
|
(1)% |
|
|
(16,881 |
) |
Cost of rentals |
|
|
(7,149 |
) |
|
3% |
|
|
(6,950 |
) |
Transaction costs |
|
|
(582 |
) |
|
95% |
|
|
(299 |
) |
Other selling, general and administrative |
|
|
(32,987 |
) |
|
14% |
|
|
(28,969 |
) |
Depreciation and amortization |
|
|
(1,737 |
) |
|
(9)% |
|
|
(1,909 |
) |
Total operating expenses |
|
|
(59,250 |
) |
|
|
|
|
(55,008 |
) |
Operating income |
|
|
4,208 |
|
|
|
|
|
2,635 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
(4,987 |
) |
|
26% |
|
|
(3,950 |
) |
Other income (expense) |
|
|
(3,066 |
) |
|
161% |
|
|
(1,174 |
) |
Total other expense, net |
|
|
(8,053 |
) |
|
|
|
|
(5,124 |
) |
Total pre-tax loss from continuing operations |
|
$ |
(3,845 |
) |
|
|
|
$ |
(2,489 |
) |
Durable Medical Equipment Revenue
For the year ended June 30, 2022, revenues from the sale of medical equipment and sleep study services were $36.2 million and $5.6 million, respectively, compared to $32.3 million and $5.2 million, respectively, for the year ended June 30, 2021. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021.
Revenue from medical equipment rentals was $21.7 million for the year ended June 30, 2022 as compared to $20.2 million for the year ended June 30, 2021. The increases relate to contributions from AMPM.
The results for the year ended June 30, 2022 were hindered by global supply chain issues which significantly restricted our ability to procure continuous positive airway pressure (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 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. Margins on both sales and services as well as rentals increased year over year primarily due to revenue reserve improvements of $2.4 million achieved through strategic investments into our revenue cycle management processes in the prior year. The benefit of these improvements on rental margins were partially offset by vendor surcharges implemented to address increased costs related to ongoing global supply chain issues.
22
General and administrative expenses consist of employee-related, facility-related, freight and shipping, information technology and other costs. For the year ended June 30, 2022 and 2021, general and administrative expenses at our durable medical equipment business include benefits of $2.3 million and $4.6 million, respectively, related to ERCs claimed during each period. Exclusive of these benefits, employee-related costs were $24.5 million and $22.5 million for the year ended June 30, 2022 and 2021, respectively. The $2.0 million increase in employee related costs is primarily due to costs relating to acquired AMPM and MedOne employees. Facility-related expenses for the year ended June 30, 2022 of $3.4 million remained consistent with prior year, as incremental footprint of AMPM acquisition was offset with reduced rental expense on leases renewed office space leases during the COVID-19 pandemic. Freight and shipping expense also remained consistent with prior year at $1.7 million. Information technology expense increased by $0.2 million to $2.4 million during the year ended June 30, 2022 as compared to the prior year related to software support for acquired AMPM and MedOne employees. Other costs of $3.3 million for the year ended June 30, 2022 decreased by $0.3 million as compared to $3.6 million in the prior year primarily attributable to reduced professional fees.
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 year ended June 30, 2022 decreased slightly as we reduced discretionary capital expenditures during the year.
Transaction costs increased for the year ended June 30, 2022 as compared to the prior period as they primarily relate to one-time expenses incurred in the acquisition of MedOne in the current year and AMPM in the prior year.
Durable Medical Equipment Other Income (Expense)
Interest expense increased to $5.0 million for the year ended June 30, 2022 as compared to $4.0 million in the prior year. The increase is attributable primarily to higher outstanding principal balances of the HC LLC preferred stock of $38.1 million as compared to $25.1 million outstanding under the Corbel Facility and DME Revolver (both as defined below under "Borrowings") prior to the refinancing in December 2020.
Other income (expense) includes recurring fair value adjustments of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest, as well as debt extinguishment costs. During the years ended June 30, 2022 and 2021, the durable medical equipment business recognized a charge of $2.1 million and a gain of $0.7 million, respectively, related to the embedded derivative valuation. These charges and benefits have an off-setting impact in our General Corporate activity and are eliminated in consolidation. In addition, for the year ended June 30, 2021, our durable medical equipment business recognized a non-cash charge of $0.9 million related to write-offs of unamortized discounts and deferred financing costs upon the redemption of $6.0 million par value HC LLC Series A-1 preferred stock. $4.2 million of these redemptions related to HC LLC Series A-1 preferred stock held by Forest, and therefore $0.7 million of these non-cash charges are reflected as an offsetting benefit in our General Corporate activity and eliminates in consolidation. This compares to a debt extinguishment charge of $1.9 million recorded during the year ended June 30, 2021 related to the paydown of the Corbel Facility in December 2020.
23
Investment Management
The key metrics of our investment management business include:
The following table provides the results of our investment management business:
|
|
For the years ended June 30, |
|
|
|||||||
(in thousands) |
|
2022 |
|
|
Percent Change |
|
2021 |
|
|
||
Revenue: |
|
|
|
|
|
|
|
|
|
||
Total revenue |
|
$ |
4,516 |
|
|
41% |
|
$ |
3,210 |
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
||
Non-cash compensation |
|
|
(1,872 |
) |
|
147% |
|
|
(757 |
) |
|
Other general and administrative |
|
|
(4,879 |
) |
|
74% |
|
|
(2,810 |
) |
|
Depreciation and amortization |
|
|
(523 |
) |
|
11% |
|
|
(473 |
) |
|
Total operating expenses |
|
|
(7,274 |
) |
|
|
|
|
(4,040 |
) |
|
Operating income (loss) |
|
|
(2,758 |
) |
|
|
|
|
(830 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
(161 |
) |
|
59% |
|
|
(101 |
) |
|
Other income (expense) |
|
|
(5,633 |
) |
|
NM |
|
|
3,654 |
|
|
Total other income (expense), net |
|
|
(5,794 |
) |
|
|
|
|
3,553 |
|
|
Total pre-tax income (loss) from continuing operations |
|
$ |
(8,552 |
) |
|
|
|
$ |
2,723 |
|
|
NM - not meaningful
Investment Management Revenue
Investment management revenues include management fees, property management fees and administration fees related to services provided to certain managed investment vehicles. For the years ended June 30, 2022 and 2021, we recognized $3.6 million and $2.7 million, respectively, of management fee revenue and $0.7 million and $0.6 million, respectively, of administration fee revenue. The increase in management fee revenue for the year ended June 30, 2022 as compared to the year ended June 30, 2021 is attributable to higher assets under management at GECC related to market recoveries and the successful completion of rights offerings and $0.3 million of management fees earned the Monomoy REIT management agreement, which was acquired in May 2022. Administration fee revenue for the year ended June 30, 2022 increased as compared to the prior year primarily related to higher administrative costs to manage GECC. In conjunction with the acquisition of the Monomoy REIT management agreement in May 2022 we began earning property management fees, recognizing $0.2 million for the year ended June 30, 2022.
Investment Management Costs and Expenses
Non-cash compensation costs increased $1.1 million for the year ended June 30, 2022 as compared to the year ended June 30, 2021. The increase includes $0.6 million in charges upon the final discretionary vesting of 5-year performance awards initially granted in November 2016. In addition, ad-hoc awards were granted upon the acquisition of the Monomoy REIT management agreement in May 2022 and annual awards were 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 non-cash compensation. The $2.1 million increase in general and administrative costs for the year ended June 30, 2022 is primarily attributable to an increase in allocated payroll costs, bonus accruals and consulting fees including the assembled workforce acquired in conjunction with the Monomoy REIT management agreement.
24
Investment Management Other Income (Expense)
Other income and expense primarily consisted of dividend income and realized/unrealized gains or losses on the Company’s managed investments in GECC, Monomoy UpREIT and the underlying investments of our consolidated fund GESOF. Dividend income on managed investments for the years ended June 30, 2022 and 2021 was $2.8 million and $3.0 million, respectively. In addition, we recognized net realized and unrealized losses of $7.8 million during the year ended June 30, 2022 as compared to net gains of $0.7 million during the year ended June 30, 2021. We mark-to-market our investment in GECC and underlying investments of GESOF by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end. Our investment in Monomoy UpREIT is adjusted quarterly based on net asset value as supported by recurring property valuations.
General Corporate
The following table provides the results of our general corporate business:
|
|
For the years ended June 30, |
|
|
|||||||
(in thousands) |
|
2022 |
|
|
Percent Change |
|
2021 |
|
|
||
Revenue: |
|
|
|
|
|
|
|
|
|
||
Total revenue |
|
$ |
876 |
|
|
51% |
|
$ |
579 |
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
||
Non-cash compensation |
|
|
(1,339 |
) |
|
34% |
|
|
(998 |
) |
|
Transaction costs |
|
|
(499 |
) |
|
(19)% |
|
|
(618 |
) |
|
Other general and administrative |
|
|
(4,594 |
) |
|
2% |
|
|
(4,504 |
) |
|
Depreciation and amortization |
|
|
(1 |
) |
|
0% |
|
|
(1 |
) |
|
Total operating expenses |
|
|
(6,433 |
) |
|
|
|
|
(6,121 |
) |
|
Operating loss |
|
|
(5,557 |
) |
|
|
|
|
(5,542 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
(5,384 |
) |
|
66% |
|
|
(3,252 |
) |
|
Other income (expense) |
|
|
8,322 |
|
|
NM |
|
|
1,716 |
|
|
Total other expense, net |
|
|
2,938 |
|
|
|
|
|
(1,536 |
) |
|
Total pre-tax loss from continuing operations |
|
$ |
(2,619 |
) |
|
|
|
$ |
(7,078 |
) |
|
General Corporate Revenue
For the years ended June 30, 2022 and 2021, General Corporate revenue consists of fees earned by Great Elm DME Manager, LLC (DME Manager), a subsidiary in our general corporate segment, for consulting services provided to HC LLC, a subsidiary in our durable medical equipment segment. In addition to this revenue, DME Manager earns fees for consulting services provided to our consolidated subsidiary, Forest. These intercompany revenues and corresponding expenses are eliminated in consolidation.
General Corporate Costs and Expenses
Non-cash compensation of $1.3 million during the year ended June 30, 2022 reflects an increase of $0.3 million as compared to the prior year, and relates primarily to the election by our directors to receive their compensation entirely in the form of shares instead of cash.
Transaction costs primarily consist of professional fees in connection with our acquisitions of businesses as well as diligence for potential future opportunities.
Other general and administrative costs primarily consisted of professional fees, employee-related and facility-related costs for our finance, legal and other administrative functions as well as professional fees and payroll costs in connection with our diligence efforts towards identifying asset and business acquisition opportunities. These costs remained relatively flat, increasing $0.1 million during the year ended June 30, 2022 as compared to the prior year.
General Corporate Other Income (Expense)
Interest expense primarily consists of interest on the Convertible Notes issued in March 2020, as well as on Forest Preferred Stock, which was issued in December 2020. Interest expense increased $2.1 million during the year ended June 30, 2022 as compared to the year ended June 30, 2021 primarily due to the fact that the Forest preferred stock was only outstanding for six months during the prior year. In addition, the Company issued $26.9 million in face value GEGGL Notes in May 2022 which incurred $0.2 million of interest during the year ended June 30, 2022.
25
Other income (expense) during the years ended June 30, 2022 and 2021 includes intercompany interest income of $4.7 million and $2.4 million, respectively, related to Forest's investments in HC LLC preferred stock. Changes in the valuation of the embedded derivative in the HC LLC Series A-2 preferred stock resulted in a benefit of $2.1 million and a charge of $0.7 million during the years ended June 30, 2022 and 2021, respectively. This income has corresponding and offsetting impacts in the durable medical equipment business and such impacts are eliminated in consolidation. Other income (expense) includes dividends earned and net gains/losses on passive investments. Prior to the acquisition of the Monomoy REIT management agreement in May 2022, the Company held a passive investment in the Monomoy Fund. Dividends and gains on this investment were $0.7 million during the year ended June 30, 2022. Lastly, during the year ended June 30, 2022 General Corporate activity included a $0.8 million benefit related to the redemption of $4.8 million of HC LLC Series A-1 preferred stock held by Forest, which has an offsetting charge in our durable medical equipment business.
Income Taxes
We do not expect that we will owe any federal taxes for the years ended June 30, 2022 and 2021, however, we provided for intraperiod taxes allocated between continuing operations and discontinued operations during the year ended June 30, 2021 related to our sale of our real estate business. There were no intraperiod allocations during the year end June 30, 2022. During 2021, the Company recognized an income tax benefit with respect to discontinued operations of $0.1 million related to intraperiod allocations. State and local taxes were approximately $0.02 million and $1.7 million for the years ended June 30, 2022 and 2021, respectively. State tax provisions during the year ended June 30, 2021 are primarily attributable to discrete taxable entity re-organization transactions at HC LLC and Great Elm Capital GP, LLC.
Summary of Discontinued Operations
On June 23, 2021, the Company’s majority-owned indirect subsidiary Great Elm FM Acquisition, Inc., entered into an agreement with Monomoy Properties Fort Myers, LLC (Monomoy FM) to sell the Company’s real estate business to Monomoy FM for $4.6 million in cash. The real estate business consists of majority-interests in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida. The Company acquired the real estate business in March 2018 for $2.7 million. After transaction costs, the gain on the sale was $0.3 million.
The sale of the real estate business, which has historically been disclosed as its own reportable segment, represents a strategic shift away from the direct ownership and operation of real estate properties. Accordingly, our historical financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations.
(in thousands) |
|
For the year ended June 30, 2021 |
|
|
Discontinued operations: |
|
|
|
|
Net revenue |
|
$ |
5,005 |
|
Real estate expenses |
|
|
(505 |
) |
Depreciation and amortization |
|
|
(1,689 |
) |
Operating income from discontinued operations |
|
|
2,811 |
|
Interest expense |
|
|
(2,536 |
) |
Gain on sale of real estate business |
|
|
263 |
|
Pretax income from discontinued operations |
|
|
538 |
|
Income tax benefit |
|
|
111 |
|
Net income from discontinued operations |
|
$ |
649 |
|
Operations of the discontinued real estate business were relatively flat year over year. Upon sale of the business on June 23, 2021, we recognized a gain on sale of $0.3 million. In addition, we also recorded a tax benefit of $0.1 million related to intraperiod tax allocations to the discontinued operations.
Liquidity and Capital Resources
The following table presents selected financial information and statistics:
|
|
As of June 30, |
|||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
||
Current Assets |
|
$ |
84,440 |
|
|
$ |
88,534 |
|
|
Current Liabilities |
|
|
19,694 |
|
|
|
33,005 |
|
|
Working Capital |
|
$ |
64,746 |
|
|
$ |
55,529 |
|
|
Long Term Liabilities |
|
$ |
106,139 |
|
|
$ |
73,440 |
|
|
26
|
|
For the years ended June 30, |
|||||||
(in thousands) |
|
2022 |
|
|
2021 |
|
|
||
Cash provided by (used in) operating activities |
|
$ |
29,280 |
|
|
$ |
(18,976 |
) |
|
Cash used in investing activities |
|
|
(40,047 |
) |
|
|
(15,482 |
) |
|
Cash provided by financing activities |
|
|
9,980 |
|
|
|
18,340 |
|
|
Net decrease in cash and cash equivalents |
|
$ |
(787 |
) |
|
$ |
(16,118 |
) |
|
Working Capital and Cash Flows
As of June 30, 2022, we have cash of $23.6 million and investments with a fair value of $48.0 million.
We intend to make acquisitions that will likely result in our investment of all of our liquid financial resources, the issuance of equity securities and the incurrence of 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. See “Item 1A. Risk Factors.”
Cash Provided by or Used in Operating Activities. Cash flows provided by operating activities totaled $29.3 million for the year ended June 30, 2022. Cash flows provided by operating activities are primarily driven by net sales of investments by consolidated funds of approximately $23.2 million and also includes non-cash activity of $8.8 million for depreciation and amortization, $2.8 million in stock-based compensation and $8.1 million in realized loss on investments. These inflows were partially offset by the net loss of $14.8 million.
Cash flows used in operating activities totaled $19.0 million for the June 30, 2021. Net cash used in operating activities consisted primarily of the net loss of $7.9 million and net purchases of investments of $25.5 million, partially offset by $8.7 million in non- cash depreciation and amortization, $1.9 million in non-cash interest and amortization and loss on extinguishment of debt of $1.9 million.
Cash Used in Investing Activities. Cash flows used in investing activities totaled $40.0 million for the year ended June 30, 2022, primarily consisting of $15.0 million in net purchases of interests in Monomoy UpREIT, $17.5 million for participation in the GECC rights offering and $6.4 million in capital expenditures related to purchases of equipment held for rental.
Cash flows used in investing activities totaled $15.5 million for the year ended June 30, 2021. Net cash used in investing activities primarily consists of $6.7 million in purchases of equipment held for rental, $8.8 million in participation in related party rights offering and $4.7 million purchases of investments, partially offset by $4.4 million in net proceeds received from the sale of the real estate business.
Cash Provided by Financing Activities. Cash flows provided by financing activities totaled $10.0 million for the year ended June 30, 2022 and primarily consisted of $26.9 million in proceeds from the issuance of the GEGGL baby bonds. This was partially offset by approximately $11.4 million in cash outflows related to the change in due to broker of the consolidated fund and $3.9 million in distributions made to non-controlling interests of GESOF.
Cash flows provided by financing activities totaled $18.3 million for the year ended June 30, 2021. Net cash inflows primarily consisted of $37.7 million in gross proceeds from the JPM Transaction, $11.2 million in margin borrowing due to broker from investment purchases in the consolidated funds, capital contributions from non-controlling interests in the consolidated funds of $4.8 million and $3.6 million in proceeds from new equipment financing debt. Such inflows were partially offset by principal payments of $33.4 million on our debt, $1.6 million in debt extinguishment costs and capitalized issuance costs of $1.3 million in connection with the JPM Transaction.
Borrowings
As of June 30, 2022, the Company had $26.9 million in outstanding aggregate principal of 7.25% Notes due 2027 (the GEGGL Notes). The GEGGL Notes are due on June 30, 2027, and interest is paid quarterly. The GEGGL Notes include covenants that limit additional indebtedness or the payment of dividends subject to compliance with a net consolidated debt to equity ratio.
As of June 30, 2022 the Company had $36.1 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. To date, all interest on these instruments have been paid-in-kind.
27
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 June 30, 2022, GECM had a $6.3 million promissory note related to the purchase of the Monomoy REIT investment management agreement (the Seller Note). The Seller Note is due on August 4, 2023 and is payable at GECM’s option with either cash, GECC shares owned by GEG, or newly issued GEG shares (subject to shareholder approval). There are no prepayment penalties. The Seller Note bears interest at 6.5%, which is paid quarterly.
As of June 30, 2022, JPM held $35.0 million face value in shares of Forest Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than $300 million. The 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 June 30, 2022, Corbel and VHG, both related parties, held a combined $0.8 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 the 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.
As of June 30, 2022, we had an undrawn credit facility with Banc of California that accrues interest at the prime rate plus 0.4% (at June 30, 2022, the effective rate was 5.2%) 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 includes 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 June 30, 2022.
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 June 30, 2022, the Company had $3.0 million in equipment financing debt outstanding.
Restrictions on Subsidiary Dividends
The ability of HC LLC to pay dividends is subject to compliance with the restricted payment covenants under the DME Revolver.
Off-Balance Sheet Obligations
As of June 30, 2022, we did not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in our consolidated financial statements.
28
New Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 8 by reference.
Per Rule 3-09 of Regulation S-X, the audited financial statements of GECC for the years ended December 31, 2021 and 2020 included in GECC’s annual report on Form 10-K/A (File No. 814-01211), filed with the SEC on April 19, 2022 are incorporated herein by reference. We include the financial statements of GECC because our investment in GECC met the test of significance under Rule 3-09 in Regulation S-X. The management of GECC is responsible for the form and content of GECC’s financial statements. Certain officers and directors of GECC are also officers and directors of GEG. Matthew A. Drapkin is a director of our Board and also the Chairman of GECC's Board of Directors, and Adam M. Kleinman is our President as well as the Chief Compliance Officer of GECC.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective as of June 30, 2022.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for preparation of the accompanying consolidated financial statements in accordance with US GAAP.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
29
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2021 as required by the Exchange Act. In making this assessment, we used the criteria set forth in the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework, management concluded that Great Elm Group, Inc.’s internal control over financial reporting was effective as of June 30, 2022.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Items 401, 405, 406, and 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K will be contained in our definitive proxy statement (our Proxy Statement) and is hereby incorporated by reference thereto.
Item 11. Executive Compensation.
The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 201(d) and Item 403 of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 404 and Item 407(a) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.
Item 14. Principal Accountant Fees and Services.
The information required by Item 9(e) of Schedule 14A will be contained in our Proxy Statement and is hereby incorporated by reference thereto.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 15 by reference.
Financial Statement Schedules
Schedules are omitted because they are not required or are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
30
Exhibits
The exhibit index attached hereto is incorporated by reference. We will furnish any exhibit upon request made to our Corporate Secretary, 800 South Street, Suite 230, Waltham, MA 02453. We charge $0.50 per page to cover expenses of copying and mailing.
EXHIBIT INDEX
We will furnish any exhibit upon request made to our Corporate Secretary, 800 South Street, Suite 230, Waltham, MA 02453. We charge $0.50 per page to cover expenses of copying and mailing.
Unless otherwise indicated, all references are to filings by Great Elm Group, Inc. (the Registrant) with the Securities and Exchange Commission under File No. 001-39832
Exhibit No. |
|
Description |
2.1 |
|
|
|
|
|
2.2* |
|
|
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
4.1 |
|
|
|
|
|
4.2 |
|
|
|
|
|
4.3 |
|
|
|
|
|
4.4 |
|
|
|
|
|
4.5 |
|
|
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|
|
4.6 |
|
|
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|
4.7 |
|
|
|
|
|
4.8 |
|
|
|
|
|
4.9 |
|
|
|
|
|
4.10 |
|
|
|
|
|
10.1+ |
|
|
|
|
|
10.2+ |
|
|
|
|
|
10.3+ |
|
|
|
|
|
10.4+ |
|
31
|
|
|
10.5+ |
|
|
|
|
|
10.6+ |
|
|
|
|
|
10.7+ |
|
|
|
|
|
10.8+ |
|
|
|
|
|
10.9+ |
|
|
|
|
|
10.10+ |
|
|
|
|
|
10.11+ |
|
|
|
|
|
10.12+ |
|
|
|
|
|
10.13+ |
|
|
|
|
|
10.14+ |
|
|
|
|
|
10.15+ |
|
|
|
|
|
10.16+ |
|
|
|
|
|
10.17+ |
|
|
|
|
|
10.18+ |
|
|
|
|
|
10.19 |
|
|
|
|
|
10.20 |
|
|
|
|
|
10.21 |
|
|
|
|
|
10.22 |
|
|
|
|
|
32
10.23 |
|
|
|
|
|
14.1 |
|
|
|
|
|
21.1 |
|
|
|
|
|
23.1 |
|
Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm |
|
|
|
23.2 |
|
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
99.1 |
|
|
|
|
|
101 |
|
Materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, formatted in inline Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Notes to the Condensed Consolidated Financial Statements, tagged in detail (furnished herewith). |
|
|
|
104 |
|
The cover page from the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, formatted in inline XBRL (included as Exhibit 101). |
* Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. GEG hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission.
+ Indicates a management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary.
We have elected not to provide a Form 10-K summary.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of September 12, 2022.
|
GREAT ELM GROUP, INC. |
||
|
|
|
|
|
By: |
|
/s/ Peter A. Reed |
|
Name: |
|
Peter A. Reed |
|
Title: |
|
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of September 12, 2022.
Signature |
|
Title |
|
|
|
/s/ Peter A. Reed |
|
Chief Executive Officer |
Peter A. Reed |
|
(Principal Executive Officer) |
|
|
|
/s/ Brent J. Pearson |
|
Chief Financial Officer & Chief Accounting Officer |
Brent J. Pearson |
|
(Principal Financial and Accounting Officer) |
|
|
|
/s/ Matthew A. Drapkin |
|
Director |
Matthew A. Drapkin |
|
|
|
|
|
/s/ Thomas S. Harbin III |
|
Director |
Thomas S. Harbin III |
|
|
|
|
|
/s/ James H. Hugar |
|
Director |
James H. Hugar |
|
|
|
|
|
/s/ David Matter |
|
Director |
David Matter |
|
|
|
|
|
/s/ James P. Parmelee |
|
Director |
James P. Parmelee |
|
|
|
|
|
/s/ Jason W. Reese |
|
Director |
Jason W. Reese |
|
|
|
|
|
/s/ Eric J. Scheyer |
|
Director |
Eric J. Scheyer |
|
|
|
|
|
/s/ Jeffrey S. Serota |
|
Director |
Jeffrey S. Serota |
|
|
34
INDEX TO FINANCIAL STATEMENTS
F-1
Report of Independent Registered PUBLIC Accounting Firm
Board of Directors and Shareholders
Great Elm Group, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Great Elm Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity and contingently redeemable non-controlling interest, and cash flows for each of the two years in the period ended June 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Durable Medical Equipment Revenue Recognition – Variable Consideration
As described further in notes 2 and 3 to the financial statements, and disclosed in the consolidated statement of operations, the Company recorded $68.0 million of total revenues for the year ended June 30, 2022, of which $63.5 million related to the Durable Medical Equipment operating segment.
The Company’s revenue is recorded based on the amount that the Company expects to receive in exchange for the goods or services provided, which consists of the transaction price net of estimates for variable consideration. Actual amounts of consideration ultimately received may differ from the Company’s initial estimates. We identified the estimation of the variable consideration within the Durable Medical Equipment revenue streams as a critical audit matter.
F-2
The principal considerations for our determination that variable consideration is a critical audit matter are (i) the significant judgment exercised by the Company in estimating variable consideration and (ii) the volume and variability of information necessary to evaluate the initial amounts recorded that are subject to the Company’s estimate of variable consideration.
Our audit procedures related to the variable consideration constraint included the following, among others:
/s/
We have served as the Company’s auditor since 2019.
September 12, 2022
F-3
GREAT ELM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands, except per share amounts
ASSETS |
|
2022 |
|
|
2021 |
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable |
|
|
|
|
|
|
||
Related party receivables |
|
|
|
|
|
|
||
Investments, at fair value (cost $ |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Prepaid and other current assets |
|
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|
|
|
|
||
Assets of consolidated funds: |
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|
|
|
|
|
||
Investments, at fair value (cost $ |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Equipment held for rental, net |
|
|
|
|
|
|
||
Identifiable intangible assets, net |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Right of use assets |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY |
|
|||||||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses and other liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Current portion of related party payables |
|
|
|
|
|
- |
|
|
Current portion of lease liabilities |
|
|
|
|
|
|
||
Current portion of equipment financing debt |
|
|
|
|
|
|
||
Liabilities of consolidated funds - accrued expenses and other |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Lease liabilities, net of current portion |
|
|
|
|
|
|
||
Long term debt (face value $ |
|
|
|
|
|
- |
|
|
Related party payables |
|
|
|
|
|
- |
|
|
Related party notes payable, net of current portion |
|
|
|
|
|
- |
|
|
Convertible Notes (face value $ |
|
|
|
|
|
|
||
Equipment financing debt, net of current portion |
|
|
- |
|
|
|
|
|
Redeemable preferred stock of subsidiaries (held by related parties, face value $ |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Contingently redeemable non-controlling interest |
|
|
|
|
|
|
||
Stockholders' equity |
|
|
|
|
|
|
||
Preferred stock, $ |
|
|
|
|
|
|
||
Common stock, $ |
|
|
|
|
|
|
||
Additional paid-in-capital |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total Great Elm Group, Inc. stockholders' equity |
|
|
|
|
|
|
||
Non-controlling interests |
|
|
|
|
|
|
||
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities, non-controlling interest and stockholders' equity |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
GREAT ELM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollar amounts in thousands, except per share data
|
|
For the years ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenues: |
|
|
|
|
|
|
||
Durable medical equipment sales and services revenue |
|
$ |
|
|
$ |
|
||
Durable medical equipment rental income |
|
|
|
|
|
|
||
Investment management revenues |
|
|
|
|
|
|
||
Total revenues |
|
|
|
|
|
|
||
Operating costs and expenses: |
|
|
|
|
|
|
||
Cost of durable medical equipment sold and services |
|
|
|
|
|
|
||
Cost of durable medical equipment rentals(1) |
|
|
|
|
|
|
||
Durable medical equipment other operating expenses(2) |
|
|
|
|
|
|
||
Investment management expenses |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Selling, general and administrative(3) |
|
|
|
|
|
|
||
Expenses of consolidated funds |
|
|
|
|
|
|
||
Total operating costs and expenses |
|
|
|
|
|
|
||
Operating loss |
|
|
( |
) |
|
|
( |
) |
Dividends and interest income |
|
|
|
|
|
|
||
Net realized and unrealized gain (loss) on investments |
|
|
( |
) |
|
|
|
|
Net realized and unrealized gain (loss) on investments of consolidated funds |
|
|
( |
) |
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
Extinguishment of debt |
|
|
( |
) |
|
|
( |
) |
Other income, net |
|
|
|
|
|
|
||
Loss from continuing operations, before income taxes |
|
|
( |
) |
|
|
( |
) |
Income tax expense |
|
|
( |
) |
|
|
( |
) |
Loss from continuing operations |
|
|
( |
) |
|
|
( |
) |
Discontinued operations: |
|
|
|
|
|
|
||
Income from discontinued operations, net of tax |
|
|
- |
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Less: net loss attributable to non-controlling interest, continuing operations |
|
|
( |
) |
|
|
( |
) |
Less: net income attributable to non-controlling interest, discontinued operations |
|
|
- |
|
|
|
|
|
Net loss attributable to Great Elm Group, Inc. |
|
$ |
( |
) |
|
$ |
( |
) |
Basic income (loss) per share |
|
|
|
|
|
|
||
Continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
Discontinued operations |
|
|
- |
|
|
|
|
|
Net loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted income (loss) per share from: |
|
|
|
|
|
|
||
Continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
Discontinued operations |
|
|
- |
|
|
|
|
|
Net loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
(1) Includes depreciation expense of: |
|
|
|
|
|
|
||
(2) Net of CARES Act Stimulus of: |
|
|
|
|
|
|
||
(3) Net of CARES Act Stimulus of: |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GREAT ELM GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND CONTINGENTLY REDEEMABLE NON-CONTROLLING INTEREST
Dollar and share amounts in thousands |
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
|
Total Great Elm Group, Inc. Stockholders' |
|
|
Non- |
|
|
Total Stockholders' |
|
|
|
Contingently Redeemable Non-controlling |
|
|||||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
|
|
Interest |
|
||||||||
BALANCE, June 30, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
$ |
|
|||||||
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Issuance of common stock related to vesting of restricted stock |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|||
Distributions to non-controlling interest holders of DME Inc. |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Repurchase of interests in subsidiary |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
- |
|
||
Issuance of Forest common stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
- |
|
||
Deemed capital contribution related to issuance of convertible notes |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||
Issuance of interests in Consolidated Fund |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
- |
|
||
Sale of real estate business |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
- |
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||
BALANCE, June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Issuance of common stock related to vesting of restricted stock |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
||||
Repurchase of interests in subsidiary |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
- |
|
|
Issuance of common stock related to asset purchase |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||||
Issuance of interests in Consolidated Fund |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
- |
|
||
Distribution of interests in Consolidated Fund |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
- |
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|||
BALANCE, June 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
$ |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GREAT ELM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
|
|
For the years ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Net income from discontinued operations |
|
|
- |
|
|
|
( |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Sales of investments by consolidated funds |
|
|
|
|
|
|
||
Purchases of investments by consolidated funds |
|
|
( |
) |
|
|
( |
) |
Stock dividends received |
|
|
( |
) |
|
|
( |
) |
Unrealized gain on investments |
|
|
( |
) |
|
|
( |
) |
Realized loss on investments |
|
|
|
|
|
|
||
Unrealized loss (gain) on investments of consolidated funds |
|
|
|
|
|
( |
) |
|
Realized loss (gain) on investments of consolidated funds |
|
|
|
|
|
( |
) |
|
Non-cash interest and amortization of capitalized issuance costs |
|
|
|
|
|
|
||
Loss on extinguishment of debt |
|
|
|
|
|
|
||
Deferred tax (benefit) expense |
|
|
( |
) |
|
|
|
|
Other non-cash expense, net |
|
|
|
|
|
|
||
Gain on sale of equipment held for rental |
|
|
( |
) |
|
|
( |
) |
Change in fair value of contingent consideration |
|
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Related party receivable |
|
|
( |
) |
|
|
( |
) |
Accounts receivable |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Prepaid assets, deposits, and other assets |
|
|
|
|
|
( |
) |
|
Operating leases |
|
|
( |
) |
|
|
( |
) |
Deferred revenues |
|
|
( |
) |
|
|
( |
) |
Related party payable |
|
|
|
|
|
- |
|
|
Accounts payable, accrued liabilities and other liabilities |
|
|
( |
) |
|
|
|
|
Net cash provided by (used in) operating activities - continuing operations |
|
|
|
|
|
( |
) |
|
Net cash provided by operating activities - discontinued operations |
|
|
- |
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Acquisition of businesses, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Acquisition of assets |
|
|
( |
) |
|
|
- |
|
Purchases of investments |
|
|
( |
) |
|
|
( |
) |
Sales of investments |
|
|
|
|
|
|
||
Participation in related party rights offering |
|
|
( |
) |
|
|
( |
) |
Purchases of equipment held for rental |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of equipment held for rental |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities - continuing operations |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities - discontinued operations |
|
|
- |
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
F-7
GREAT ELM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Dollar amounts in thousands
|
|
For the years ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds of issuance of baby bond |
|
|
|
|
|
- |
|
|
Principal payments on revolving line of credit |
|
|
- |
|
|
|
( |
) |
Principal payments on note payable to seller |
|
|
- |
|
|
|
( |
) |
Principal payments on equipment financing |
|
|
( |
) |
|
|
( |
) |
Proceeds from equipment financing |
|
|
|
|
|
|
||
Redemption of redeemable preferred stock of subsidiary |
|
|
( |
) |
|
|
- |
|
Capitalized issuance costs |
|
|
( |
) |
|
|
( |
) |
Due to broker of consolidated funds |
|
|
( |
) |
|
|
|
|
Repurchase of interests in subsidiary |
|
|
( |
) |
|
|
( |
) |
Payments of debt extinguishment costs |
|
|
- |
|
|
|
( |
) |
Dividends paid to non-controlling interest holders of DME Inc. |
|
|
- |
|
|
|
( |
) |
Issuance of Forest preferred stock |
|
|
- |
|
|
|
|
|
Capital contributions from non-controlling interests in consolidated funds |
|
|
|
|
|
|
||
Distributions to non-controlling interests in consolidated funds |
|
|
( |
) |
|
|
- |
|
Proceeds from issuance of Forest common stock, gross |
|
|
- |
|
|
|
|
|
Net cash provided by financing activities - continuing operations |
|
|
|
|
|
|
||
Net cash used in financing activities - discontinued operations |
|
|
- |
|
|
|
( |
) |
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents at beginning of year |
|
|
|
|
|
|
||
Cash and cash equivalents at end of year |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Non-cash investing and financing activities |
|
|
|
|
|
|
||
Non-cash consideration transferred and debt issued in asset acquisition |
|
$ |
|
|
$ |
- |
|
|
Lease liabilities and right of use assets arising from operating leases |
|
|
|
|
|
|
||
Contingent consideration |
|
|
|
|
|
|
||
Distribution of HC LLC (as defined below) preferred stock to non-controlling interest holders of DME Inc. |
|
|
- |
|
|
|
|
|
Repurchase of GP Corp. Note |
|
|
- |
|
|
|
|
|
Issuance of convertible notes |
|
|
- |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
GREAT ELM GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Great Elm Group, Inc. (referred to as the Company) is a holding company incorporated in Delaware. The Company currently has
Investment Management
On September 27, 2016, the Company’s wholly-owned SEC-registered investment advisor subsidiary Great Elm Capital Management, Inc. (GECM), a Delaware corporation, entered into an investment management agreement (the IMA) with Great Elm Capital Corp., a publicly-traded business development company incorporated in Maryland (GECC).
On May 4, 2022, GECM acquired the investment management agreement of Monomoy Properties REIT, LLC (Monomoy REIT) from Imperial Capital Asset Management, LLC (ICAM). Formed in 2014, Monomoy REIT is a private real estate investment trust founded by ICAM, with a 108-property portfolio of diversified net leased industrial assets.
The Company earns revenue through the investment management agreements of these and other private investment vehicles which provide for management fees, property management fees, incentive fees and administrative fees.
Durable Medical Equipment
On September 7, 2018, the Company, through its majority-owned subsidiary, Great Elm DME Holdings, Inc. (DME Holdings), acquired an
On May 31, 2021, our wholly-owned subsidiary DME Holdings exchanged their
General Corporate
On December 29, 2020, the Company completed a non-taxable reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc (GEG). Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG”. Forest common stock was then delisted from the Nasdaq Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Holding Company Reorganization (as defined in Note 4 – Holding Company Reorganization and Financing Transaction) was a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.
F-9
Discontinued Operations
We launched our real estate business in March 2018 with an investment of $
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Wholly-owned subsidiaries include GECM, Great Elm Opportunities GP, Inc. (GEO GP), Great Elm Capital GP, LLC (GEC GP), Great Elm FM Acquisition, Inc. (FM Acquisition), DME Holdings and Great Elm DME Manager, LLC (DME Manager). Majority-owned subsidiaries include Forest, HC LLC and its seven wholly-owned subsidiaries. In addition, we have determined that the Company is the primary beneficiary of certain variable interest entities, and therefore the operations of those entities have been included in our consolidated results for the relevant periods.
Basis of Presentation and Use of Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. The most important of these estimates and assumptions relate to revenue recognition, the valuation of excess and obsolete inventories, depreciable lives of equipment, impairment of long lived tangible and intangible assets, valuation allowance for deferred tax assets, fair value measurements including stock-based compensation and contingent consideration, estimates associated with the application of acquisition accounting, and the value of lease liabilities and corresponding right to use assets. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.
In addition, the historical results of the real estate business operating segment have been reflected in the accompanying consolidated statements of operations for the year ended June 30, 2021 as discontinued operations. See Note 5 – Discontinued Operations.
Principles of Consolidation
The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries, majority-owned subsidiaries, and subsidiaries in which we hold a controlling financial interest as of the financial statement date. In most cases, a controlling financial interest often reflects ownership of a majority of the voting interests. We consolidate a variable interest entity (VIE) when we possess both the power to direct the activities of the VIE that most significantly impacts its economic performance and we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE.
All intercompany accounts and transactions have been eliminated in consolidation.
Non-controlling interests in the Company’s subsidiaries are reported as a component of equity, separate from the parent company’s equity or outside of permanent equity for non-controlling interests that are contingently redeemable. See Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiary. Results of operations attributable to the non-controlling interests are included in the Company’s consolidated statements of operations.
Segments
The Company has
F-10
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase. Cash equivalents consist primarily of exchange-traded money market funds. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.
Accounts Receivable
Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the patient customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors), based on the contractual agreements. The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers. Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected. The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers. Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers. The revenue reserves related to constraints on variable consideration were $
The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. There were no material adjustments to revenues made in the year ended June 30, 2022 relating to prior periods. Changes in variable consideration are recorded as a component of net revenues.
The Company generally does not allow returns from providers for reasons not covered under the manufacturer’s standard warranty. Therefore, there is no provision for sales return reserves. The Company does not have significant bad debt experience with Payors, and therefore the allowance for doubtful accounts is immaterial.
As of June 30, 2022 the Company had unbilled receivables of approximately $
Investments
Investments include investments in GECC, Monomoy Properties UpREIT, the operating partnership of Monomoy REIT (Monomoy UpREIT), and other private funds, which are carried at fair value.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under US GAAP. See Note 8 – Fair Value Measurements.
Property, Equipment and Rental Equipment
The Company records property and equipment acquired at cost. The costs of property acquired from asset acquisitions or business combinations is recorded at fair value at the date of acquisition based on its estimated replacement costs.
F-11
Within the durable medical equipment businesses, the Company capitalizes the cost of equipment predominantly leased out to patient customers within equipment held for rental, net. These purchases are classified as cash outflows from investing activities when they are paid. The Company capitalizes the cost of equipment predominantly sold to patient customers within inventories. These purchases are classified as cash outflows from operating activities when they are paid. A portion of equipment recorded within equipment held for rental, net, could ultimately be sold. A portion of equipment recorded within inventories could ultimately be leased. Management is not able to accurately project the ultimate use of equipment, which in many cases is determined by Payor reimbursement terms, and has therefore adopted the above stated policy.
Management has estimated the useful lives of equipment leased to customers where title ultimately transfers to customers (e.g., capped rentals, typically
The Company recognizes depreciation in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives, which considers the term of lease for any leased assets. The Company capitalizes expenditures for improvements that significantly extend the useful life of an asset. The Company charges expenditures for maintenance and repairs to operations in the periods incurred. When assets are sold, the asset and accumulated depreciation are eliminated, and a gain or loss is recognized in operating income.
Depreciation is recognized using the straight-line method over their estimated useful lives as follows:
Description |
|
Life in Years |
Property and Equipment |
|
|
Leasehold improvements |
|
|
Vehicles |
|
|
Sleep study equipment |
|
|
Furniture and fixtures |
|
|
Computer equipment and software |
|
|
Rental Equipment |
|
|
Medical equipment for lease |
|
Inventories
Inventories, which principally consist of durable medical equipment and related supplies that are predominantly sold, are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventories for items that are potentially excess, obsolete, or slow-moving based on changes in customer demand, technology developments or other economic factors. The Company bases its provisions for excess, expired and obsolete inventory primarily on purchasing activity and usage. A significant change in the timing or level of demand for our products as compared with forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. As the Company purchases all of its inventories, all inventories are categorized as finished goods. There were
Goodwill and Other Identifiable Intangible Assets
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized for US GAAP purposes. Instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter, or as required when impairment triggering events are identified.
The Company amortizes its identifiable intangible assets over their estimated useful lives using a discounted cash flow attribution or straight-line methods as determined appropriate for each identifiable intangible asset. The Company amortizes its identifiable intangible assets over periods ranging from to
F-12
Long-lived Assets
Long-lived assets include property and equipment, intangible assets and the right to use asset. These assets are evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable based on undiscounted cash flows. If an impairment is indicated, the Company records the impaired asset at fair value and records a charge to operations.
Leases and Right of Use Assets
We determine if an arrangement is a lease at inception. As of June 30, 2022, all of our leases are operating leases. Operating leases are included in right of use (ROU) assets, current portion of lease liabilities and lease liabilities net of current portion in the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide a readily determinable implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU assets also include any lease payments made and adjustments recorded in acquisition accounting. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, primarily consisting of common area maintenance charges, and have elected the practical expedient to account for lease and non-lease components together as a single lease component.
Cost of Durable Medical Equipment Sold and Services
Cost of durable medical equipment sold and services is comprised of costs included in inventory for medical equipment sold and direct costs associated with providing sleep study services, including staff to perform the studies and supplies used in the studies.
Cost of Durable Medical Equipment Rentals
Cost of rentals includes depreciation on medical equipment held for lease and related maintenance expenses.
Durable Medical Equipment Other Operating Expenses
The Company classifies direct expenses of its durable medical equipment segment, including payroll, facilities and equipment costs, professional fees and other administrative costs, in durable medical equipment other operating expenses in the accompanying consolidated statements of operations.
Investment Management Expenses
The Company classifies all direct expenses of its investment management segment including: payroll, stock-compensation, and related taxes and benefits; facilities costs; and consulting; in investment management expenses in the accompanying consolidated statements of operations.
Depreciation and Amortization
The Company has separately presented depreciation and amortization expense, except for depreciation expense which is included in cost of durable medical equipment rentals as described above. Such depreciation and amortization expense is based on the estimated useful lives of the underlying assets.
F-13
Stock-based Compensation
Stock-based compensation costs for eligible employees and directors are measured at fair value on the date of grant and are expensed over the requisite service period using a straight-line attribution method for the entire award that are subject to only service vesting conditions. Awards with both performance and service requirements are expensed using a graded vesting attribution method over the requisite service periods.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary, in order to reduce deferred tax assets to the amounts more likely than not to be recovered.
The Company has established a valuation allowance for its deferred tax assets that are not recoverable from taxable temporary differences because the Company is unable to conclude that future utilization of a portion of its net operating loss carryforwards and other deferred tax assets is more likely than not.
The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations for federal and several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company does not recognize income tax benefits for positions that it takes on its income tax returns that do not meet the more likely than not standard on its technical merits.
Asset Acquisitions and Business Combinations
Asset acquisitions are accounted for using the cost accumulation method while business combinations are accounted for at fair value. Determining whether the acquired set represents an asset acquisition or a business combination requires quantitative and qualitative assessments that require judgment.
In an asset acquisition, acquisition costs are capitalized as part of the acquired set. The accounting for asset acquisitions requires estimates and judgment to allocate the costs incurred to acquire the assets among the assets acquired using their relative fair value. As such, the values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.
F-14
In a business combination, acquisition costs are expensed as incurred and recorded in selling, general and administrative expenses; previously held equity interests are valued at fair value upon the acquisition of a controlling interest; restructuring costs associated with a business combination are expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. Measurement period adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed. The fair value of contingent consideration is remeasured each period based on relevant information and changes to the fair value are included in the operating results for the period within general and administrative expense.
Net Income (Loss) Per Share
The following table presents the calculation of basic and diluted earnings (loss) per share:
|
|
For the years ended June 30, |
|
|||||
(in thousands except per share amounts) |
|
2022 |
|
|
2021 |
|
||
Loss from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
Income from discontinued operations, net of tax |
|
|
- |
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Less: net loss attributable to non-controlling interest, continuing operations |
|
|
( |
) |
|
|
( |
) |
Less: net income attributable to non-controlling interest discontinued operations |
|
|
- |
|
|
|
|
|
Net loss attributable to Great Elm Group, Inc. |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average shares basic and diluted: |
|
|
|
|
|
|
||
Weighted average shares of common stock outstanding |
|
|
|
|
|
|
||
Weighted average shares used in computing income (loss) per share |
|
|
|
|
|
|
||
Basic and diluted income (loss) per share from: |
|
|
|
|
|
|
||
Loss from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
Income from discontinued operations |
|
|
- |
|
|
|
|
|
Net loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. As of June 30, 2022 the Company had
As of June 30, 2022 and 2021, the Company had an aggregate of
F-15
Restrictions on Subsidiary Dividends
The ability of HC LLC to pay dividends is subject to compliance with the restricted payment covenants under the DME Revolver.
Concentration of Risk
The Company’s net investment revenue and receivables from continuing operations are primarily attributable to the management of one investment vehicle, GECC. See Note 7 – Related Party Transactions.
The Company’s durable medical equipment revenue and related accounts receivable are concentrated with third-party Payors. The following table summarizes customer concentrations as a percentage of revenues:
|
|
For the years ended June 30, |
||
|
|
2022 |
|
2021 |
Government Payor |
|
|
||
Third-party Payor |
|
|
The following table summarizes customer concentrations as a percentage of accounts receivable:
|
|
As of June 30, |
||
|
|
2022 |
|
2021 |
Government Payor |
|
|
||
Third-party Payor |
|
|
Recently Adopted Accounting Standards
Accounting for Convertible Instruments In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance in this ASU is effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company
|
|
As of June 30, 2021 |
|
|||||||||
Consolidated Balance Sheet Impact |
|
As Reported(1) |
|
|
ASU 2020-06 Adjustment |
|
|
As Adjusted(1) |
|
|||
Liabilities |
|
|
|
|
|
|
|
|
|
|||
Convertible notes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other liabilities |
|
|
|
|
|
( |
) |
|
|
|
||
Total Liabilities |
|
|
|
|
|
|
|
|
|
|||
Stockholders' equity |
|
|
|
|
|
|
|
|
|
|||
Additional paid-in-capital |
|
|
|
|
|
( |
) |
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total Great Elm Group, Inc Stockholder's Equity |
|
|
|
|
|
( |
) |
|
|
|
||
Total Stockholder's Equity |
|
|
|
|
|
( |
) |
|
|
|
F-16
|
|
For the year ended June 30, 2021 |
|
|||||||||
Consolidated Statement of Operations Impact |
|
As Reported(1) |
|
|
ASU 2020-06 Adjustment |
|
|
As Adjusted(1) |
|
|||
Non-operating expenses |
|
|
|
|
|
|
|
|
|
|||
Interest expense |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Net loss from continuing operations |
|
|
|
|
|
|
|
|
|
|||
Loss from continuing operations, before income taxes |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax expense |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Loss from continuing operations |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|||
Income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|||
Net loss |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Less: net loss attributable to non-controlling interest, continuing operations |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Less: net income attributable to non-controlling interest, discontinued operations |
|
|
|
|
|
|
|
|
|
|||
Net loss attributable to Great Elm Group |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net loss per share (basic and diluted) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
For the year ended June 30, 2021 |
|
|||||||||
Consolidated Statements of Stockholders' Equity Impact |
|
As Reported(1) |
|
|
ASU 2020-06 Adjustment |
|
|
As Adjusted(1) |
|
|||
Net loss |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Accumulated Deficit |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total Great Elm Group, Inc. Stockholder's Equity |
|
|
|
|
|
( |
) |
|
|
|
||
Total Stockholder's Equity |
|
|
|
|
|
( |
) |
|
|
|
|
|
For the year ended June 30, 2021 |
|
|||||||||
Consolidated Statement of Cash Flows Impact |
|
As Reported(1) |
|
|
ASU 2020-06 Adjustment |
|
|
As Adjusted(1) |
|
|||
Net loss |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Non-cash interest and amortization of capitalized issuance costs |
|
|
|
|
|
( |
) |
|
|
|
||
Deferred tax expense |
|
|
|
|
|
( |
) |
|
|
|
||
Net cash provided by (used in) operating activities - continuing operations |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Net cash provided by operating activities - discontinued operations |
|
|
|
|
|
- |
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities - continuing operations |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Net cash provided by investing activities - discontinued operations |
|
|
|
|
|
- |
|
|
|
|
||
Net cash used in investing activities |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Net cash provided by financing activities - continuing operations |
|
|
|
|
|
- |
|
|
|
|
||
Net cash used in financing activities - discontinued operations |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Net cash provided by financing activities |
|
|
|
|
|
- |
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Cash and cash equivalents at beginning of year |
|
|
|
|
|
- |
|
|
|
|
||
Cash and cash equivalents at end of year |
|
|
|
|
|
- |
|
|
|
|
F-17
(1)
Recently Issued Accounting Standards
Current Expected Credit Losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which changes the impairment model for financial instruments, including trade receivables from an incurred loss method to a new forward looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical experience, current information and reasonable and supportable forecasts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.
Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the United Kingdom Financial Conduct Authority which announced the desire to phase out the use of London Interbank Offered Rate (LIBOR) by the end of 2021. The provisions provide optional expedients and exceptions for applying US GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. If LIBOR ceases to exist, we may need to renegotiate outstanding notes payable outstanding which extend beyond 2021 with the respective counterparties. Adoption of the provisions in ASU 2020-04 are optional and effective from March 12, 2020 through December 31, 2022. The Company is considering the optionality of ASU 2020-04 and is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.
The revenues from each major source of revenue are summarized in the following table:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Product and Services Revenue |
|
|
|
|
|
|
||
Investment Management |
|
|
|
|
|
|
||
Management Fees |
|
$ |
|
|
$ |
|
||
Property Management Fees |
|
|
|
|
|
- |
|
|
Administration Fees |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Durable Medical Equipment |
|
|
|
|
|
|
||
Equipment Sales |
|
|
|
|
|
|
||
Service Revenues |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total product and services revenue |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Rental Revenues |
|
|
|
|
|
|
||
Durable Medical Equipment |
|
|
|
|
|
|
||
Medical Equipment Rental Income |
|
|
|
|
|
|
||
Total rental revenue |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
F-18
Revenue Accounting Under Topic 606
In determining the appropriate amount of revenue to be recognized under FASB Accounting Standards Codification Topic 606, Revenues, (Topic 606), the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) the Company satisfies each performance obligation.
Durable Medical Equipment Revenue
Equipment Sales and Services Revenues
The Company sells durable medical equipment, replacement parts and supplies to customers and recognizes revenue at the point control is transferred through delivery to the customer. Each piece of equipment, part or supply is distinct and separately priced thus they each represent a single performance obligation. The revenue is allocated amongst the performance obligations based upon the relative standalone selling price method, however, items are typically all delivered or supplied together. The customer and, if applicable, the Payors are generally charged at the time that the product is sold, although separate layers of insurance coverage may need to be invoiced before final billings may occur.
The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met.
The transaction price on both equipment sales and sleep studies is the amount that the Company expects to receive in exchange for the goods and services provided. Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility. As such, we constrain the transaction price for the difference between the amounts billed and what we believe we will collect from Payors and from patients. The transaction price therefore is predominantly based on contractual payment rates determined by the Payors. The Company does not generally contract with uninsured customers. We determine our estimates of billing adjustments based upon contractual agreements, our policies and historical experience. While the rates are fixed for the product or service with the customer and the Payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, from the patient customer. The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the Payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments we estimate will not be collected.
Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. The Company constrains revenue for these estimated adjustments. During the year ended June 30, 2022, there were no material changes in estimates relating to prior periods.
The payment terms and conditions of customer contracts vary by customer type and the products and services offered.
F-19
The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not incur contract acquisition costs. The Company generally does not have any partially or unfilled performance obligations related to contracts with customers. However, during the quarter ended June 30, 2020, the Company applied for and received $
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 sales and service revenue recognized is based on historical trends and estimates of future collectability. As of June 30, 2022 and 2021, net unbilled sales and service revenue is approximately $
Investment Management Revenue
The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer. Investment management revenue primarily consists of fees based on a percentage of assets under management, fees based on the performance of managed assets, and administrative fees. Fees are based on agreements with each investment products and may be terminated at any time by either party subject to the specific terms of each respective agreement.
Management Fees
The Company earns management fees based on the investment management agreement GECM has with GECC, Monomoy REIT and other private funds managed by GECM (collectively, the Funds). The performance obligation is satisfied over time as the services are rendered, since the managed vehicles simultaneously receive and consume the benefits provided as GECM performs services. Management fee rates range from
Property Management Fees
Under the Monomoy REIT agreement, GECM is also entitled to
F-20
Incentive Fees
The Company earns incentive fees based on the investment management agreements GECM has with GECC, Monomoy Properties II, LLC (a feeder fund of the Monomoy REIT) and separately managed accounts. Where an investment management agreement includes both management fees and incentive fees, the performance obligation is considered to be a single obligation for both fees. Incentive fees are variable consideration associated with the investment management agreements. Incentive fees are earned based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements. Incentive fees range from
Administration Fees
The Company earns administration fees based on the administration agreement GECM has with GECC and Monomoy REIT whereby the vehicles reimburse GECM for costs incurred in performing administrative functions. This revenue is recognized over time as the services are performed. Administrative fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation for each vehicle that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.
The Company also earns service fees based on a shared services agreement with certain portfolio companies of GECC. This revenue is recognized over time as the services are performed. Service fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.
Revenue Accounting Under Topic 842
Durable Medical Equipment Revenue
Equipment Rental Revenue
Under FASB Accounting Standards Codification Topic 842, Leases, (Topic 842) rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis. The contractual length of the lease term varies based on the type of equipment that is rented to the customer, but generally is from
The lease term begins on the date products are delivered to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. There were no material changes in estimates recorded in the year ended June 30, 2022, relating to prior periods.
F-21
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 $
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 June 30, 2022 and 2021, net unbilled rental revenue is approximately $
Holding Company Reorganization
On
Financing Transaction
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 and the Company agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $
In connection with such financing, among other things:
(each collectively noted above, the JPM Transactions). See Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiary.
F-22
Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility). See Note 13 – Borrowings.
Subsidiary Reorganizations
On May 31, 2021, our wholly-owned subsidiary DME Holdings exchanged their
On June 29, 2021, GP Corp assigned the rights to the Profit Sharing Agreement with GECM, their intercompany obligation under the GP Corp. Note and other assets and liabilities to their wholly-owned subsidiary GEC GP. Subsequent to the assignment, Great Elm Group, Inc. exchanged their
On June 23, 2021, the Company’s majority-owned indirect subsidiary FM Acquisition, entered into an agreement with Monomoy Properties Fort Myers, LLC (Monomoy FM) to sell the Company’s real estate business to Monomoy FM for $
Pursuant to the terms of the Purchase Agreement, the proceeds of the sale were subsequently reinvested in newly issued membership interests of Monomoy Properties, LLC (Monomoy Fund), a privately-held fund comprised of a portfolio of net leased industrial real estate assets.
The sale of the real estate business, which has historically been disclosed as its own reportable segment, represents a strategic shift away from the direct ownership and operation of real estate properties. Accordingly, our historical financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations. As a passive investor in Monomoy Fund and with a membership interest of approximately
The following table provides a reconciliation of the Company’s net income from discontinued operations presented in the consolidated statements of operations for the year ended June 30, 2021:
(in thousands) |
|
For the year ended June 30, 2021 |
|
|
Discontinued operations: |
|
|
|
|
Net revenue |
|
$ |
|
|
Real estate expenses |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
Operating income from discontinued operations |
|
|
|
|
Interest expense |
|
|
( |
) |
Gain on sale of real estate business |
|
|
|
|
Pretax income from discontinued operations |
|
|
|
|
Income tax benefit |
|
|
|
|
Net income from discontinued operations |
|
$ |
|
There was no activity from discontinued operations in the consolidated statement of operations for the year ended June 30, 2022.
F-23
Investment Management Acquisitions
Acquisition of Monomoy REIT Investment Management Agreement
On
The purchase consideration included an upfront purchase price of $
In addition, a contingent consideration agreement requires the Company to pay up to $
The transaction was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable intangible asset related to the investment management agreement. The value of the investment management agreement was estimated under the income approach using a multi-period excess earnings method. The key inputs in the valuation included forecasted assets under management, revenue and expenses, and a discount rate of
Durable Medical Equipment Acquisitions
Acquisition of MedOne Healthcare LLC
On
F-24
The purchase consideration was $
The contingent consideration arrangement requires the Company to pay up to $
Acquisition of Advanced Medical DME, LLC and PM Sleep Lab, LLC
On
The original purchase consideration was $
The contingent consideration arrangement requires the Company to pay up to $
Related party transactions are measured in part by the amount of consideration paid or received as established and agreed by the parties. Consideration paid for such services in each case is the negotiated value.
F-25
Investment Management
The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC, Monomoy REIT and other investment products. Under these agreements, GECM receives administrative fees, management fees based on the managed assets (other than cash and cash equivalents) and rent collected, and incentive fees based on the performance of those assets. See Note 3 – Revenue for additional discussions of the fee arrangements.
The Company’s wholly-owned subsidiary, GEO GP serves as the general partner of Great Elm Opportunities Fund I, LP (GEOF), a Delaware multi-series limited partnership. GECM serves as the investment manager of GEOF. As the general partner, GEO GP provides administrative services and oversees GECM’s management of the investment portfolio of GEOF. The Company’s wholly-owned subsidiary, GECM, serves as the managing member of Great Elm SPAC Opportunity Fund, LLC (GESOF), a Delaware limited liability company, 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 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. See Note 2 – Summary of Significant Accounting Policies for additional details. In July 2022, GESOF liquidated and the Company received a distribution of cash and equity investments.
The Company has retained the specialized investment company accounting guidance under US GAAP with respect to the Consolidated Funds. As such, investments of the Consolidated Funds are included in the condensed consolidated balance sheets at fair value and the net unrealized gain (loss) on those investments is included as a component of other income on the condensed consolidated income statement. Non-controlling interests in these Consolidated Funds are included in net loss attributable to non-controlling interest. As of June 30, 2022 no single issuer or investment of the Consolidated Funds had a fair value greater than
Additionally, the Company receives dividends from its investment in GECC and Monomoy UpREIT and earns unrealized profits and losses based on the mark-to-market performance of its investments in GECC and Monomoy UpREIT. See Note 8 – Fair Value Measurements.
The following tables summarize activity and outstanding balances between the managed investment products and the Company.
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Net realized and unrealized gain (loss) on investments |
|
$ |
( |
) |
|
$ |
|
|
Net realized and unrealized gain (loss) on investments of consolidated funds |
|
|
( |
) |
|
|
|
|
Dividend income |
|
|
|
|
|
|
|
|
As of June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Dividends receivable |
|
$ |
|
|
$ |
|
||
Investment management revenues receivable |
|
|
|
|
|
|
||
Receivable for reimbursable expenses paid |
|
|
|
|
|
|
F-26
Outstanding receivables are included in related party receivables in the consolidated balance sheets. Outstanding receivables from the Consolidated Funds are eliminated in consolidation. As of June 30, 2022 and 2021, the Company had $
The Company owns approximately
On June 13, 2022, GECC completed a non-transferable rights offering in which the Company and its subsidiaries received
On
Shortly after the transaction, our existing investment in Monomoy Fund (which continues to be managed by ICAM) was redeemed and proceeds reinvested in Monomoy UpREIT.
In October 2020, GECM entered into a shared personnel and reimbursement agreement with Imperial Capital Asset Management, LLC (ICAM). Costs incurred under this agreement are included in investment management expenses in the condensed consolidated statement of operations. For the years ended June 30, 2022 and 2021, such costs were $
Durable Medical Equipment
In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into the Corbel Facility. Jeffrey S. Serota, a member of the Company’s Board of Directors, serves as Vice Chairman to Corbel Capital Partners, an affiliate of Corbel. Corbel previously held an interest in Northwest and was one of the sellers in our acquisition of the business. As a result of the acquisition, at June 30, 2022 Corbel holds a non-controlling interest in HC LLC. Pursuant to the Corbel Facility, Corbel was paid a structuring fee and a quarterly monitoring fee. In conjunction with the JPM Transactions, the Corbel Facility was repaid early on December 29, 2020, and DME Inc. paid a deferred structuring fee as well as a prepayment penalty. See Note 13 - Borrowings for additional information on the Corbel Facility and Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiaries.
In connection with the acquisition of the durable medical equipment businesses, the Company issued non-controlling interests in DME Inc. to the former owners, including Corbel discussed above. These non-controlling interests in DME Inc. became non-controlling interests in HC LLC in May 2021. See Note 4 – Reorganization and Financing Transactions. See Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiary.
General Corporate
On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC. The agreement included a retainer fee of $
F-27
Additionally, the Company received dividends and realized gain on its investment in Monomoy Properties, which it held for a portion of the year ended June 30, 2022 Monomoy Properties is managed by ICAM.
(in thousands) |
|
For the year ended June 30, 2022 |
|
|
Net realized gain on investment |
|
$ |
|
|
Dividend income |
|
|
|
In conjunction with the JPM Transactions, on December 29, 2020 Forest sold Forest Preferred Stock and the Company sold common stock in Forest to JPM for cash consideration of $
On December 18, 2020, the Company purchased from JPM a
Discontinued Operations
On June 23, 2021, the Company sold its real estate business to Monomoy FM. Monomoy FM is a majority-owned subsidiary of Monomoy Fund, and pursuant to the purchase agreement the Company subsequently invested the proceeds of the sale in Monomoy Fund. Monomoy Fund is managed by ICAM. See Note 5 – Discontinued Operations.
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
US GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
All financial assets or liabilities that are measured at fair value on a recurring and
F-28
The assets and liabilities measured at fair value on a recurring and
|
|
Fair Value as of June 30, 2022 |
|
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Equity investments of Consolidated Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets within the fair value hierarchy |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Investments valued at net asset value |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Total assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Participation feature of HC LLC Series A-2 Preferred Stock |
|
$ |
|
|
$ |
|
|
* |
|
|
* |
|
|
||||
Contingent consideration liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
* Balance eliminates in consolidation.
|
|
Fair Value as of June 30, 2021 |
|
|
|||||||||||||
(in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Equity investments of Consolidated Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Investments valued at net asset value |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Total assets |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Participation feature of HC LLC Series A-2 Preferred Stock |
|
$ |
|
|
$ |
|
|
* |
|
|
* |
|
|
||||
Contingent consideration liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
There were
The following is a reconciliation of changes in contingent consideration, a Level 3 liability:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Beginning Balance |
|
$ |
|
|
$ |
- |
|
|
Additions |
|
|
|
|
|
|
||
Payments |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Ending Balance |
|
$ |
|
|
$ |
|
The valuation techniques applied to investments held by the Company and by the Consolidated Funds vary depending on the nature of the investment.
Equity and equity-related securities
Securities traded on a national securities exchange are stated at the close price on the valuation date. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level 1.
F-29
Investments in private funds
The Company values investments in private funds using net asset value (NAV) as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of FASB Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.
As of June 30, 2022, investments in private funds consist of our investment in Monomoy UpREIT and Sharp Alpha Fund I, LP (Sharp Alpha), a closed-end limited partnership focused on gaming technologies. Monomoy UpREIT allows redemptions annually with
As of June 30, 2021, investments in private funds consisted of our investment in Monomoy Fund, an industrial real estate-focused fund. Redemptions are allowed annually with
Contingent consideration
In conjunction with the acquisition of AMPM on March 1, 2021, the Company entered into a contingent consideration agreement that requires the Company to pay up to $
In conjunction with the acquisition of MedOne on August 31, 2021, the Company entered into a contingent consideration agreement that requires the Company to pay up to $
In conjunction with the acquisition of the Monomoy REIT investment management agreement, the Company entered into a contingent consideration agreement that requires the Company to pay up to $
The contingent consideration is included within the other liabilities in the consolidated balance sheets.
F-30
Participation feature of HC LLC Series A-2 Preferred Stock
On December 29, 2020, in conjunction with the JPM Transactions, the Company issued HC LLC Series A-2 Preferred Stock to our consolidated subsidiary, Forest. See Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiaries. An embedded derivative was identified in the instrument requiring bifurcation from the host instrument as a derivative to be carried at fair value. The value of the derivative related to a participation feature upon the sale of the durable medical equipment business. As of the issuance date, the fair value was determined using an option pricing model based on the transaction price. The key assumptions used in the option pricing model include a volatility rate of
See Note 13 - Borrowings for additional discussion related to the fair value of notes payable. The carrying value of all other financial assets and liabilities approximate their fair values.
The Company’s fixed assets consist of its medical equipment held for rental, furniture and fixtures, and leasehold improvements used in its operations. The following tables detail the Company’s fixed assets:
(in thousands) |
|
June 30, 2022 |
|
|
June 30, 2021 |
|
||
Property and Equipment |
|
|
|
|
|
|
||
Leasehold improvements |
|
$ |
|
|
$ |
|
||
Vehicles |
|
|
|
|
|
|
||
Computer equipment and software |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Sleep study equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Medical Equipment Held for Rental |
|
|
|
|
|
|
||
Medical equipment held for rental |
|
$ |
|
|
$ |
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
$ |
|
The following table reconciles depreciation expense included in the following lines of the consolidated statements of operations to total depreciation expense for each period presented.
|
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
|
2022 |
|
|
2021 |
|
||
Depreciation and amortization |
|
|
$ |
|
|
$ |
|
||
Cost of durable medical equipment rentals |
|
|
|
|
|
|
|
||
Total depreciation expense |
|
|
$ |
|
|
$ |
|
F-31
The Company’s investment management and durable medical equipment segments include identifiable intangible assets acquired through acquisitions in prior years. Goodwill presented on the consolidated balance sheet consists only of the goodwill acquired as part of the acquisitions of the durable medical equipment businesses.
The changes in the carrying value of goodwill are as follows:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Beginning Balance |
|
$ |
|
|
$ |
|
||
Acquisitions |
|
|
|
|
|
|
||
Purchase accounting adjustment |
|
|
- |
|
|
|
( |
) |
Ending Balance |
|
$ |
|
|
$ |
|
The Company’s annual impairment assessment date for goodwill is April 1. No impairment triggering events have been identified since our prior year annual impairment analysis. In the current year, we performed a quantitative impairment test for our annual impairment assessment. Based on the analyses performed, the fair value of the durable medical equipment reporting unit exceeded the carrying value by
The following tables provide additional detail related to the Company’s acquired identifiable intangible assets:
|
|
As of June 30, 2022 |
|
|
As of June 30, 2021 |
|
||||||||||||||||||
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||||
Durable Medical Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Tradename |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Hospital Contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment management agreements |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Assembled workforces |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
Aggregate Amortization Expense (in thousands): |
|
|
|
|
For the year ended June 30, 2022 |
|
$ |
|
|
For the year ended June 30, 2021 |
|
|
|
Estimated Future Amortization Expense (in thousands): |
|
|
|
|
For the year ending June 30, 2023 |
|
$ |
|
|
For the year ending June 30, 2024 |
|
|
|
|
For the year ending June 30, 2025 |
|
|
|
|
For the year ending June 30, 2026 |
|
|
|
|
For the year ending June 30, 2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
|
|
F-32
Medical Equipment Leases
Through its majority-owned subsidiary HC LLC, and the subsidiaries of HC LLC, the Company owns medical equipment which is leased to customers. The Company’s customers consist primarily of patients through their clinical providers including medical centers, clinics and hospices and the Company has lease arrangements with these patients. In addition, the arrangements between the Company and its customers are impacted by arrangements between the Company and Payors. The Payors may cover a portion or all of the rental payments under the agreements between the Company and its customers. The patient is responsible for any residual co-payments.
The lease terms may be for a pre-determined time period, generally
All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The Company has elected to account for the lease component and the non-lease components as a single combined lease component for all classes of underlying assets.
(in thousands) |
|
June 30, 2022 |
|
|
June 30, 2021 |
|
||
Facilities |
|
|
|
|
|
|
||
Right of use assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Current portion of lease liabilities |
|
|
|
|
|
|
||
Lease liabilities, net of current portion |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted-average remaining life |
|
|
|
|
||||
Weighted-average discount rate |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
Right of use assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Current portion of lease liabilities |
|
|
|
|
|
|
||
Lease liabilities, net of current portion |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted-average remaining life |
|
|
|
|
||||
Weighted-average discount rate |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Equipment |
|
|
|
|
|
|
||
Right of use assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Current portion of lease liabilities |
|
|
|
|
|
|
||
Lease liabilities, net of current portion |
|
|
- |
|
|
|
|
|
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted-average remaining life |
|
|
|
|
||||
Weighted-average discount rate |
|
|
% |
|
|
% |
F-33
As of June 30, 2022, the Company had total right of use assets of $
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. Certain operating leases include variable lease costs which are not material and are included in operating lease costs. Additional details are presented in the following table:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Facilities |
|
|
|
|
|
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Cash paid for operating leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Cash paid for operating leases |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Equipment |
|
|
|
|
|
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Cash paid for operating leases |
|
|
|
|
|
|
The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases:
(in thousands) |
|
|
|
|
For the year ending June 30, 2023 |
|
|
|
|
For the year ending June 30, 2024 |
|
|
|
|
For the year ending June 30, 2025 |
|
|
|
|
For the year ending June 30, 2026 |
|
|
|
|
For the year ending June 30, 2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
$ |
|
|
Imputed interest |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
Durable Medical Equipment
The facility leases include offices, retail and warehouse space and sleep labs. The facility leases have original or amended terms ranging from
The vehicles leases have original lease terms of
Equipment leases consist of office equipment with original lease terms ranging from
F-34
Investment Management
A lease for office space located in Charleston, South Carolina was assumed as part of the acquisition of the Monomoy REIT investment management agreement in May 2022. The non-cancellable lease term expires
General Corporate
The Company entered into a lease for office space located in Waltham, MA. This office space is allocated between the investment management and general corporate segments. On the commencement date of the lease, the non-cancellable term was for
The lease payments commenced on October 1, 2017, four months after the Company began to occupy the space. On an annual basis, the lease payments increase at an average rate of approximately
Related party borrowings of the Company’s subsidiaries are summarized in the following table:
|
|
|
|
As of June 30, |
|
|||||
(in thousands) |
|
Subsidiaries |
|
2022 |
|
|
2021 |
|
||
Seller Note |
|
GECM |
|
$ |
|
|
$ |
- |
|
|
GP Corp. Note |
|
GEC GP |
|
* |
|
|
* |
|
||
Total principal |
|
|
|
$ |
|
|
$ |
- |
|
|
Unamortized debt issuance cost |
|
|
|
|
- |
|
|
|
- |
|
Total long-term related party notes payable |
|
|
|
|
|
|
|
- |
|
|
Less current portion of related party notes payable |
|
|
|
|
- |
|
|
|
- |
|
Related party notes payable, net of current portion |
|
|
|
$ |
|
|
$ |
- |
|
*Balance eliminates in consolidation.
The Company’s and subsidiaries’ other outstanding borrowings are summarized in the following table:
|
|
|
|
As of June 30, |
|
|||||
(in thousands) |
|
Subsidiaries |
|
2022 |
|
|
2021 |
|
||
GEGGL Notes |
|
GEG |
|
$ |
|
|
$ |
- |
|
|
DME Revolver |
|
HC LLC and subsidiaries |
|
|
- |
|
|
|
- |
|
Equipment Financing |
|
HC LLC and subsidiaries |
|
|
|
|
|
|
||
Total principal |
|
|
|
$ |
|
|
$ |
|
||
Unamortized debt discounts and issuance costs |
|
|
|
|
( |
) |
|
|
- |
|
Total other outstanding borrowings |
|
|
|
|
|
|
|
|
||
Less current portion of other outstanding borrowings |
|
|
|
|
( |
) |
|
|
( |
) |
Other outstanding borrowings, net of current portion |
|
|
|
$ |
|
|
$ |
|
The Company incurred interest expense on these borrowings of $
F-35
The Company’s aggregate future required principal debt repayments are summarized in the following table:
(in thousands) |
|
Principal Due |
|
|
For the year ending June 30, 2023 |
|
$ |
|
|
For the year ending June 30, 2024 |
|
|
|
|
For the year ending June 30, 2025 |
|
|
- |
|
For the year ending June 30, 2026 |
|
|
- |
|
For the year ending June 30, 2027 |
|
|
|
|
Thereafter |
|
|
- |
|
Total |
|
$ |
|
|
|
|
|
|
Additional details of each borrowing by operating segment are discussed below.
Durable Medical Equipment
In connection with the acquisition of DME Inc., the Company assumed a secured note (Corbel Facility) with a principal balance of $
The Corbel Facility was repaid on December 29, 2020. The repayment included deferred structuring fees of $
The Corbel Facility was held by Corbel, a related party, which also holds a non-controlling interest in DME Inc. and HC LLC Series A-1 Preferred Stock. See Note 7 – Related Party Transactions and Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiary.
Principal payments and interest expense incurred on the Corbel Facility for the year ended June 30, 2021 were $
There were
The borrowings under the DME Revolver are collateralized by the assets of the durable medical equipment business and the Company is required to meet certain financial covenants.
The DME Revolver includes covenants that restrict HC LLC’s and its subsidiaries’ 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 June 30, 2022.
F-36
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 to
Investment Management
On May 4, 2022 as part of the consideration paid to acquire the Monomoy REIT asset management agreement, GECM issued ICAM a $
During the year ended June 30, 2022, the Company incurred $
As part of the entry into the investment management business, the Company acquired certain assets from MAST Capital Management, LLC (MAST Capital) and in consideration for those assets, GP Corp. issued a senior secured note payable (the GP Corp. Note). The GP Corp. Note matures in
During the year ended June 30, 2021, the Company incurred interest expense of $
General Corporate
On June 9, 2022, we issued $
The GEGGL Notes include covenants that limit additional indebtedness or the payment of dividends subject to compliance with a net consolidated debt to equity ratio of
F-37
On February 26, 2020, the Company issued Convertible Notes at par with an aggregate principal balance of $
The Company may, subject to compliance with the terms of the Convertible Notes, effect the conversion of some or all of the Convertible Notes into shares of common stock, subject to certain liquidity and pricing requirements, as specified in the Convertible Notes.
The embedded conversion feature in the Convertible Notes qualifies for the scope exception to derivative accounting in ASC Topic 815, Derivatives and Hedging, for certain contracts involving a reporting entity’s own equity. The Company incurred $
The Company incurred interest expense of $
|
|
As of June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Convertible Notes principal |
|
$ |
|
|
$ |
|
||
Unamortized issuance costs |
|
|
( |
) |
|
|
( |
) |
Total Convertible Notes |
|
|
|
|
|
|
F-38
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
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.
Holders of non-controlling interests (NCI) or preferred stock in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity or permanent equity.
|
|
As of June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
HC LLC |
|
|
|
|
|
|
||
Temporary equity |
|
|
|
|
|
|
||
Permanent equity |
|
|
|
|
|
|
||
Total HC LLC |
|
|
|
|
|
|
||
GEC GP |
|
|
|
|
|
|
||
Permanent equity |
|
|
- |
|
|
|
( |
) |
Consolidated Funds |
|
|
|
|
|
|
||
Permanent equity |
|
|
|
|
|
|
||
Forest |
|
|
|
|
|
|
||
Permanent equity |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
F-39
The following table summarizes the net income (loss) attributable to the non-controlling interests on the consolidated statements of operations:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
DME Inc. |
|
|
|
|
|
|
||
Temporary equity |
|
|
- |
|
|
|
( |
) |
Permanent equity |
|
|
- |
|
|
|
( |
) |
Total DME Inc. |
|
|
- |
|
|
|
( |
) |
HC LLC |
|
|
|
|
|
|
||
Temporary equity |
|
|
( |
) |
|
|
- |
|
Permanent equity |
|
|
( |
) |
|
|
- |
|
Total HC LLC |
|
|
( |
) |
|
|
- |
|
GP Corp. |
|
|
|
|
|
|
||
Permanent equity |
|
|
- |
|
|
|
( |
) |
GEC GP |
|
|
|
|
|
|
||
Permanent equity |
|
|
( |
) |
|
|
( |
) |
Consolidated Funds |
|
|
|
|
|
|
||
Permanent equity |
|
|
( |
) |
|
|
( |
) |
Forest |
|
|
|
|
|
|
||
Permanent equity |
|
|
|
|
|
|
||
FM Holdings |
|
|
|
|
|
|
||
Permanent equity |
|
|
- |
|
|
|
|
|
Total |
|
$ |
( |
) |
|
$ |
( |
) |
HC LLC and DME Inc. – Non-controlling interest classified as temporary equity
In connection with the acquisition of the acquired businesses on September 7, 2018, the Company issued a
As a result of the reorganization discussed in Note 4 – Reorganization and Financing Transactions the non-controlling interests in DME Inc. became non-controlling interests in HC LLC on May 31, 2021.
The holder of this non-controlling interest, Corbel, is also the holder of the Series A-1 Preferred Stock and previously was the holder of the Corbel Facility. See Note 7 – Related Party Transactions and Note 13 – Borrowings.
HC LLC and DME Inc. – Non-controlling interest classified as permanent equity
In connection with the acquisition of the acquired businesses on September 7, 2018, the Company issued one of the former owners, a
F-40
As a result of the reorganization discussed in Note 4 – Reorganization and Financing Transactions the non-controlling interests in DME Inc. became non-controlling interests in HC LLC on May 31, 2021.
GP Corp. – Non-controlling interest classified as permanent equity
In connection with the acquisition of the investment management business in November 2016, the Company issued certain affiliates and employees of the Company a
GEC GP – Non-controlling interest classified as permanent equity
As described above, on June 29, 2021 Great Elm Group, Inc. exchanged their
Forest – Non-controlling interest classified as permanent equity
In connection with the JPM Transactions on December 29, 2020, the Company sold JPM a
The holder of this non-controlling interest, JPM, is also the holder of Forest Preferred Stock discussed below. See Note 7 – Related Party Transactions.
Consolidated Funds – Non-controlling interest classified as permanent equity
As of June 30, 2022 and 2021, GEG held
FM Holdings – Non-controlling interest classified as permanent equity
In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a
F-41
Redeemable Preferred Stock of Subsidiaries
The following table summarizes the preferred stock activity:
|
|
Balance, as of June 30, 2021 |
|
|
Issuance of Preferred Stock |
|
|
Redemption of Preferred Stock |
|
|
Balance, as of June 30, 2021 |
|
|
Issuance of Preferred Stock |
|
|
Redemption of Preferred Stock |
|
|
Balance, as of June 30, 2022 |
|
|||||||
HC LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Series A-1 Preferred Stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|||
Series A-2 Preferred Stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Total HC LLC |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|||
Forest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Forest Preferred Stock |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Total |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
HC LLC - Series A-1 Preferred Stock classified as a liability
In connection with the JPM Transactions, the Company issued
As the shares of Series A-1 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations.
The fair value of each share of Series A-1 Preferred Stock on the issuance date was determined to be $
The holders of the Series A-1 Preferred Stock include our majority-owned consolidated subsidiary Forest (
HC LLC Series A-2 Preferred Stock classified as a liability
In connection with the JPM Transactions, the Company issued
F-42
As the shares of Series A-2 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations.
We have identified the feature allowing holders of the HC LLC Series A-2 Preferred Stock to participate in up to 33% of proceeds arising from a sale of the durable medical equipment business as an embedded derivative. We have bifurcated this embedded derivative from the mandatorily redeemable preferred stock host and have recorded the derivative liability at fair value. The fair value of the derivative liability on the issuance date was $
The holder of the Series A-2 Preferred Stock is our majority-owned consolidated subsidiary Forest. Such shares and related embedded derivatives issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation.
Forest Preferred Stock classified as a liability
In connection with the JPM Transactions, Forest issued
As the preferred shares are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the preferred stock are included in interest expense in the consolidated statement of operations.
The fair value of each share of Forest Preferred Stock on the issuance date was determined to equal its face value based on the transaction price. Debt issuance costs of $
The holder of the Forest Preferred Stock is JPM, who is also the holder of the non-controlling interests in Forest discussed above. See Note 7 – Related Party Transactions.
Tax Benefits Preservation Agreement
On January 28, 2018, the Board of Directors of the Company adopted a Tax Benefits Preservation Agreement, between the Company and Computershare Trust Company, N.A., as Rights Agent (the Rights Plan) to replace the Company’s existing Tax Benefits Preservation Agreement, which expired on January 29, 2018, (the Expired Agreement). The Rights Plan is substantially the same as the Expired Agreement. In October 2017, the original Rights Plan was approved by the Company’s stockholders.
The Rights Plan is designed to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, by restricting the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of
F-43
Pursuant to the terms of the Rights Plan, the Company’s Board of Directors declared a dividend distribution of
The Tax Rights are not exercisable until the Distribution Date and will expire at the earlier of (a) January 29, 2028; (b) the time when the Tax Rights are redeemed as provided therein; (c) the time when the Rights are exchanged as provided therein; (d) the repeal of Section 382 of the Code if the Independent Directors (as defined in the Rights Plan) determine that the Rights Plan is no longer necessary for the preservation of Tax Benefits (as defined in the Rights Planet); (e) the beginning of the taxable year of the Company to which the Company’s Board of Directors determines that no Tax Benefits may be carried forward, unless previously redeemed or exchanged by the Company.
Stock Plans
In November 2013, the Company’s stockholders approved the Amended and Restated 1999 Directors’ Equity Compensation Plan (the Directors’ Plan). Options and awards granted to new or existing Outside Directors (as defined in the Directors’ Plan) under the Directors’ Plan vest ratably over a period of to
In June 2016, the Company’s stockholders approved the Great Elm Group, Inc. 2016 Long-Term Incentive Plan (the 2016 Long-Term Incentive Plan) and the Great Elm Group, Inc. 2016 Employee Stock Purchase Plan (the 2016 Employee Stock Purchase Plan). In October 2018, the Company’s stockholders approved amendments to the 2016 Long-Term Incentive Plan. In November 2021, the Company’s stockholders approved an increase to the number of shares available for issuance under the Long-Term Incentive Plan. As of June 30, 2022, the Company had a total of
The following table summarizes the number of common shares available for future issuance under the plans discussed above as of June 30, 2022:
Shares of Common Stock Available for Future Issuance |
|
|||
Directors' Plan |
|
|
|
|
2016 Long-Term Incentive Plan |
|
|
|
|
2016 Employee Stock Purchase Plan |
|
|
|
|
Total |
|
|
|
F-44
Non-Employee Director Deferred Compensation Plan
In December 2020, the Company established the Great Elm Group, Inc. Non-Employee Directors Deferred Compensation Plan allowing non-employee directors to defer their cash and/or equity compensation under a non-revocable election for each calendar year. Such compensation is deferred until the earlier of
Restricted Stock Awards and Restricted Stock Units
In November 2021, the Compensation Committee of the Board of Directors (the Compensation Committee) in its discretion determined that an aggregate of
During the year ended June 30, 2022, the Company granted
Restricted stock units granted are subject to service requirements. The Company accounts for forfeitures of the restricted stock units in the period incurred. During the year ended June 30, 2022 the Company granted
The aggregate grant date fair value of restricted stock granted during the years ended June 30, 2022 and 2021 was $
The activity of the Company’s restricted stock awards and units for the year ended June 30, 2022 was as follows:
Restricted Stock Awards and Restricted Stock Units |
|
Restricted Stock |
|
|
Weighted Average Grant Date Fair Value |
|
||
Outstanding at June 30, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at June 30, 2022 |
|
|
|
|
$ |
|
Stock Options
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and assumptions noted in the following table. The Company estimates the expected term for new grants based upon actual historical experience. The Company’s expected volatility for the expected term of the option is based upon the historical volatility experienced in the Company’s stock price. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company determines the fair value of non-vested shares based on the Nasdaq closing stock price on the date of grant.
The ranges of assumptions used to value options granted were as follows:
|
|
For the years ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Expected volatility |
|
|
|
|
||||
Expected dividends |
|
|
- |
|
|
|
- |
|
Expected term (years) |
|
|
|
|
||||
Risk-free rate |
|
|
|
|
F-45
The option activity for the year ended June 30, 2022 was as follows:
Options |
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (years) |
|
|
Aggregate Intrinsic Value |
|
||||
Outstanding at June 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Forfeited, cancelled or expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding at June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Exercisable at June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Vested and expected to vest as of June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
The weighted average grant date fair value of options, per share, granted during the years ended June 30, 2022 and 2021 was $
Stock-based compensation expense totaled $
As of June 30, 2022 and 2021, the Company had unrecognized compensation cost related to all unvested share awards and options totaling $
During the year ended June 30, 2022, 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 grant date value of GECC shares awarded for the year ended June 30, 2022 was $
The Company had loss from continuing operations before provision for income taxes of $
The provision for income taxes includes the following:
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Current |
|
$ |
|
|
$ |
|
||
Deferred |
|
$ |
( |
) |
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
The Company recognized an income tax expense from continuing operations of $
There were
F-46
The following table reconciles the expected corporate federal income tax expense (benefit), computed by multiplying the Company's loss before income taxes by the statutory tax rate of
|
|
For the years ended June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Federal tax benefit at statutory rate |
|
$ |
( |
) |
|
$ |
( |
) |
State taxes net of federal impact |
|
|
( |
) |
|
|
( |
) |
Permanent adjustments |
|
|
|
|
|
|
||
Change in valuation allowance |
|
|
( |
) |
|
|
( |
) |
Provision to return true-up |
|
|
|
|
|
( |
) |
|
Deferred remeasurement |
|
|
|
|
|
( |
) |
|
Net operating loss and credit expirations |
|
|
|
|
|
|
||
Stock compensation adjustment |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
Total tax expense |
|
$ |
|
|
$ |
|
The tax effect of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows:
|
|
As of June 30, |
|
|||||
(in thousands) |
|
2022 |
|
|
2021 |
|
||
Deferred Tax Assets: |
|
|
|
|
|
|
||
Net operating loss carryforwards |
|
$ |
|
|
$ |
|
||
Accruals and allowances not deductible for tax purposes |
|
|
|
|
|
|
||
Acquired intangibles |
|
|
|
|
|
- |
|
|
Stock based compensation |
|
|
|
|
|
|
||
Unrealized loss on investment |
|
|
|
|
|
|
||
Lease liability |
|
|
|
|
|
|
||
Investment in partnerships |
|
|
|
|
|
|
||
Interest expense carryforward |
|
|
|
|
|
- |
|
|
Total deferred tax assets, gross |
|
$ |
|
|
$ |
|
||
Less: valuation allowance |
|
$ |
( |
) |
|
$ |
( |
) |
Total deferred tax assets, net |
|
$ |
|
|
$ |
|
||
Deferred Tax Liabilities: |
|
|
|
|
|
|
||
Right to use asset |
|
$ |
( |
) |
|
$ |
( |
) |
Acquired intangibles |
|
|
- |
|
|
|
( |
) |
Convertible debt discount |
|
|
( |
) |
|
|
- |
|
Goodwill |
|
|
( |
) |
|
|
( |
) |
Total deferred tax liabilities |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Total deferred tax liabilities, net (indefinite-lived assets) |
|
$ |
( |
) |
|
$ |
( |
) |
In light of the Company's history of cumulative operating losses, the Company recorded a valuation allowance for all of its federal and state deferred tax assets, as it is presently unable to conclude that it is more likely than not that the federal and state deferred tax assets in excess of deferred tax liabilities will be realized. The decrease of $
F-47
As of June 30, 2022, the Company has net operating loss (NOL) carryforwards for federal and state income tax purposes of approximately $
The following table reflects federal NOL carryforwards that will expire beginning in the fiscal year ended June 30, 2023 (in thousands):
Fiscal Year of Expiration |
|
Federal NOL |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 through 2037 |
|
|
|
|
Indefinite |
|
|
|
|
Total |
|
$ |
|
During the years ended June 30, 2022 and 2021, the total amount of gross unrecognized tax benefit activity was as follows (in thousands):
Balance as of June 30, 2020 |
|
$ |
|
|
Reductions for tax positions of prior years |
|
|
( |
) |
Lapse of statute of limitations |
|
|
( |
) |
Balance as of June 30, 2021 |
|
|
|
|
Addition for tax positions of prior years |
|
|
|
|
Reductions for tax positions of prior years |
|
|
( |
) |
Lapse of statute of limitations |
|
|
( |
) |
Balance as of June 30, 2022 |
|
$ |
|
During the year ended June 30, 2021, the Company’s unrecognized tax benefits decreased by $
As of June 30, 2022 and 2021, the Company had approximately $
The Company’s policy is to include interest and penalties related to unrecognized tax benefits in tax expense on the Company’s consolidated statements of operations. As of June 30, 2022 and 2021,
Although timing of the resolution and/or closure on the Company's unrecognized tax benefits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.
F-48
The Company files U.S. federal and U.S. state tax returns. Because of NOL carryforwards, substantially all of the Company's tax years, from the 1995 through 2022 fiscal years, remain open to IRS examinations with the exception of the 2010 and 2009 fiscal years for which IRS examinations have been completed. Substantially all of the Company’s tax years, from the 1995 through 2022 fiscal years, remain open to state tax examination.
The Company allocates resources based on
In June 2021, the Company sold our real estate business. Due to its classification as a discontinued operation, our historical segment information has been recast to remove real estate as a reportable segment.
The following tables summarize the results of operations by segment.
|
|
For the year ended June 30, 2022 |
|
|||||||||||||||||
(in thousands) |
|
Durable Medical Equipment |
|
|
Investment Management(1) |
|
|
General Corporate(1) |
|
|
Intercompany Eliminations(2) |
|
|
Consolidated Total |
|
|||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
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) from continuing operations |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
|
For the year ended June 30, 2021 |
|
|||||||||||||||||
(in thousands) |
|
Durable Medical Equipment |
|
|
Investment Management(1) |
|
|
General Corporate(1) |
|
|
Intercompany Eliminations(2) |
|
|
Consolidated Total |
|
|||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
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) from continuing operations |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
F-49
The following tables summarize assets by segments:
|
|
As of June 30, 2022 |
|
|||||||||||||
(in thousands) |
|
Durable Medical Equipment |
|
|
Investment Management(1) |
|
|
General Corporate(1) |
|
|
Total |
|
||||
Fixed assets, net |
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|||
Identifiable intangible assets, net |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|||
Goodwill |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
As of June 30, 2021 |
|
|||||||||||||
(in thousands) |
|
Durable Medical Equipment |
|
|
Investment Management(1) |
|
|
General Corporate(1) |
|
|
Total |
|
||||
Fixed assets, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Identifiable intangible assets, net |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|||
Goodwill |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
F-50