Great Elm Group, Inc. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39832

Great Elm Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware	85-3622015
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
800 South Street, Suite 230, Waltham MA	02453
(Address of principal executive offices)	(Zip Code)

(617) 375-3006

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

GEG

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 2, 2022, there were 27,466,513 shares of the registrant’s common stock outstanding.

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and June 30, 2021	3
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2022 and 2021	4
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three and nine months ended March 31, 2022	5
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three and nine months ended March 31, 2021	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2022 and 2021	7
	Unaudited Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55

PART II. OTHER INFORMATION		55

Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 6.	Exhibits	56

SIGNATURES		57

Unless the context otherwise requires, “we,” “us,” “our,” “GEG," the “Company” and terms of similar import refer to Great Elm Group, Inc. and/or its subsidiaries. Our corporate website address is www.greatelmcap.com. The information contained in, or accessible through, our corporate website does not constitute part of this report. On December 29, 2020, the Company completed a reorganization of the Company’s corporate structure, and outstanding shares of Great Elm Capital Group, Inc. (GEC) were automatically converted into shares of common stock of the Company. Where context requires, references to “we,” “us,” “our,” “GEG” and the “Company” include GEC.

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:

▪

the ability of Great Elm Capital Management, Inc. (GECM) to profitably manage Great Elm Capital Corp. (NASDAQ: GECC), a business development company (BDC) that we manage through our investment management business;

▪

the dividend rate that GECC will pay;

▪

the ability of GECM to profitably manage private Great Elm SPAC Opportunity Fund, LLC (GESOF), a privately-held fund with a focus on investments in special purpose acquisition companies that we manage through our investment management business;

▪

our ability to continue to develop and grow our durable medical equipment and investment management businesses;

▪

our ability to raise capital to fund our business plan;

▪

our ability to make acquisitions and manage any businesses we may acquire;

▪

conditions in the equity capital markets and debt capital markets as well as the economy generally, including interest rate volatility and inflationary pressures;

▪

our ability to maintain the security of electronic and other confidential information;

▪

serious disruptions and catastrophic events, including the impact of the novel coronavirus (COVID‑19) pandemic on the global economy;

▪

the impact of on-going or worsening supply chain challenges;

▪

competition, mostly from larger, well-financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds;

▪

outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith;

▪

maintaining our contractual arrangements and relationships with third parties;

▪

our ability to attract, assimilate, develop and retain key personnel;

▪

compliance with laws, regulations and orders;

▪

changes in laws and regulations governing our operations; and

▪

other factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 under “Risk Factors” or as set forth from time to time in our Securities and Exchange Commission (SEC) filings.

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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Great Elm Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Dollar amounts in thousands (except per share data)


ASSETS	March 31, 2022			June 30, 2021
Current assets:
Cash and cash equivalents	$	22,746		$	24,382
Accounts receivable		6,284			6,518
Related party receivables		1,392			1,665
Investments, at fair value (cost $44,845 and $45,326, respectively)		19,160			24,044
Inventories		949			1,066
Prepaid and other current assets		1,007			3,791
Assets of Consolidated Funds
Investments, at fair value (cost $11,726 and $26,814, respectively)		11,340			26,490
Prepaid expenses and other assets		2,708			578
Total current assets		65,586			88,534
Property and equipment, net		613			981
Equipment held for rental, net		6,810			7,391
Identifiable intangible assets, net		7,733			8,928
Goodwill		52,463			50,536
Right of use assets		4,024			5,241
Other assets		236			258
Total assets	$	137,465		$	161,869
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,635		$	5,521
Accrued expenses and other liabilities		6,044			6,955
Deferred revenue		1,420			4,438
Current portion of lease liabilities		1,663			1,920
Current portion of capitalized equipment financing		2,711			1,974
Liabilities of Consolidated Funds- accrued expenses and other		93			12,197
Total current liabilities		17,566			33,005
Lease liabilities, net of current portion		2,587			3,596
Convertible notes (face value $35,205 and $34,346, respectively, including $16,637 and $16,231, respectively, held by related parties)		34,278			33,333
Equipment financing debt, net of current portion		-			67
Redeemable preferred stock of subsidiaries (held by related parties, face value $37,018)		35,694			35,529
Other liabilities		360			915
Total liabilities		90,485			106,445
Commitments and Contingencies (Note 18)
Contingently redeemable non-controlling interest		2,262			2,639
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000 authorized and zero outstanding		-			-
Common stock, $0.001 par value; 350,000,000 shares authorized and 27,464,767 shares issued and 26,963,203 outstanding at March 31, 2022; and 26,613,913 shares issued and 25,948,100 outstanding at June 30, 2021		27			26
Additional paid-in-capital		3,309,704			3,307,613
Accumulated deficit		(3,274,750	)		(3,264,403	)
Total Great Elm Group, Inc. stockholders' equity		34,981			43,236
Non-controlling interests		9,737			9,549
Total stockholders' equity		44,718			52,785
Total liabilities, non-controlling interest and stockholders' equity	$	137,465		$	161,869

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

Great Elm Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

Dollar amounts in thousands (except per share data)


	For the three months ended March 31,						For the nine months ended March 31,
	2022			2021			2022			2021
Revenues:
Durable medical equipment sales and services revenue	$	10,359		$	8,606		$	30,712		$	27,363
Durable medical equipment rental income		5,275			4,511			16,205			14,907
Investment management revenues		988			728			2,992			2,261
Total revenues		16,622			13,845			49,909			44,531

Operating costs and expenses:
Cost of durable medical equipment sold and services		4,362			3,806			12,731			12,716
Cost of durable medical equipment rentals(1)		1,708			1,657			5,292			5,193
Durable medical equipment other operating expenses(2)		8,758			6,084			23,551			21,834
Investment management expenses		1,592			904			4,748			2,546
Depreciation and amortization		517			618			1,631			1,799
Selling, general and administrative(3)		1,582			1,854			4,620			4,582
Expenses of Consolidated Funds		42			19			139			27
Total operating costs and expenses		18,561			14,942			52,712			48,697
Operating loss		(1,939	)		(1,097	)		(2,803	)		(4,166	)
Dividends and interest income		642			554			1,939			2,408
Net realized and unrealized loss on investments		(3,220	)		(1,112	)		(5,055	)		(454	)
Net realized and unrealized gain (loss) on investments of Consolidated Funds		(284	)		155			(279	)		221
Interest expense		(1,354	)		(1,361	)		(4,078	)		(3,607	)
Loss on extinguishment of debt		-			-			-			(1,866	)
Other income, net		-			-			2			30
Loss from continuing operations, before income taxes		(6,155	)		(2,861	)		(10,274	)		(7,434	)
Income tax benefit (expense)		20			43			86			(6	)
Loss from continuing operations		(6,135	)		(2,818	)		(10,188	)		(7,440	)
Discontinued operations:
Income from discontinued operations, net of tax		-			73			-			211
Net loss	$	(6,135	)	$	(2,745	)	$	(10,188	)	$	(7,229	)
Less: net income (loss) attributable to non-controlling interest, continuing operations		(226	)		(173	)		159			(907	)
Less: net income attributable to non-controlling interest, discontinued operations		-			15			-			45
Net loss attributable to Great Elm Group, Inc.	$	(5,909	)	$	(2,587	)	$	(10,347	)	$	(6,367	)
Basic and diluted income (loss) per share from:
Continuing operations	$	(0.22	)	$	(0.10	)	$	(0.38	)	$	(0.25	)
Discontinued operations		-			0.00			-			0.00
Net loss	$	(0.22	)	$	(0.10	)	$	(0.38	)	$	(0.25	)
Weighted average shares outstanding
Basic		26,842			25,757			26,963			25,669
Diluted		26,842			25,757			26,963			25,669
(1) Includes depreciation expense of:		1,575			1,478			4,860			4,683
(2) Net of CARES Act Stimulus of:		-			2,275			2,321			2,275
(3) Net of CARES Act Stimulus of:		-			-			84			-

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

Great Elm Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amounts in thousands


Dollar and share amounts in thousands	Common Stock				Additional Paid-in			Accumulated			Total Great Elm Group, Inc. Stockholders'			Non- controlling			Total Stockholders'			Contingently Redeemable Non-controlling
	Shares		Amount		Capital			Deficit			Equity			Interest			Equity			Interest
BALANCE, June 30, 2021		25,948	$	26	$	3,307,613		$	(3,264,403	)	$	43,236		$	9,549		$	52,785		$	2,639
Net loss		-		-		-			(200	)		(200	)		101			(99	)		205
Issuance of interests in Consolidated Funds, net		-		-		-			-			-			527			527			-
Issuance of common stock related to vesting of restricted stock		145		0		-			-			-			-			-			-
Stock-based compensation		-		-		581			-			581			-			581			-
BALANCE, September 30, 2021		26,093	$	26	$	3,308,194		$	(3,264,603	)	$	43,617		$	10,177		$	53,794		$	2,844
Net loss		-		-		-			(4,238	)		(4,238	)		(24	)		(4,262	)		104
Redemption of interests in Consolidated Funds, net		-		-		-			-			-			(962	)		(962	)		-
Issuance of common stock related to vesting of restricted stock		722	1			-			-			1			-			1			-
Stock-based compensation		-		-		1,131			-			1,131			-			1,131			-
BALANCE, December 31, 2021		26,815	$	27	$	3,309,325		$	(3,268,841	)	$	40,511		$	9,191		$	49,702		$	2,948
Net loss		-		-		-			(5,909	)		(5,909	)		460			(5,449	)		(686	)
Repurchase of interests in subsidiary		-		-		(129	)		-			(129	)		86			(43	)		-
Issuance of common stock related to vesting of restricted stock		148	0			-			-			-			-			-			-
Stock-based compensation		-		-		508			-			508			-			508			-
BALANCE, March 31, 2022		26,963	$	27	$	3,309,704		$	(3,274,750	)	$	34,981		$	9,737		$	44,718		$	2,262

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

Great Elm Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amounts in thousands


	Common Stock				Additional Paid-in			Accumulated			Total Great Elm Group, Inc. Stockholders'			Non- controlling			Total Stockholders'			Contingently Redeemable Non-controlling
	Shares		Amount		Capital			Deficit			Equity			Interest			Equity			Interest
BALANCE, June 30, 2020		25,530	$	26	$	3,305,963		$	(3,257,144	)	$	48,845		$	3,886		$	52,731		$	3,890
Net loss		-		-		-			(3,594	)		(3,594	)		(61	)		(3,655	)		(46	)
Issuance of common stock related to vesting of restricted stock		116	0			-			-			-			-			-			-
Stock-based compensation		-		-		429			-			429			-			429			-
BALANCE, September 30, 2020		25,646	$	26	$	3,306,392		$	(3,260,738	)	$	45,680		$	3,825		$	49,505		$	3,844
Net loss		-		-		-			(187	)		(187	)		(305	)		(492	)		(292	)
Issuance of common stock related to vesting of restricted stock		45		0		-			-			-			-			-			-
Distributions to non-controlling interest holders of DME, Inc.		-		-		-			-			-			(985	)		(985	)		(985	)
Issuance of Forest common stock		-		-		-			-			-			2,700			2,700			-
Stock-based compensation		-		-		285			-			285			-			285			-
BALANCE, December 31, 2020		25,691		26		3,306,677			(3,260,925	)		45,778			5,235			51,013			2,567
Net loss		-		-		-			(2,587	)		(2,587	)		351			(2,236	)		(509	)

Issuance of common stock related to vesting of restricted stock		146		0		-			-			-			-			-			-
Non-cash distributions to non-controlling interest holders of DME, Inc.		-		-		-			-			-			(3	)		(3	)		(3	)
Deemed capital contribution related to issuance of convertible notes		-		-		602			-			602			-			602
Repurchase of interests in subsidiary		-		-		(533	)		-			(533	)		678			145
Issuance of LP interests in Consolidated Fund		-		-		-			-			-			3,275			3,275
Stock-based compensation		-		-		616			-			616			-			616			-
BALANCE, March 31, 2021		25,836	$	26	$	3,307,362		$	(3,263,512	)	$	43,876		$	9,536		$	53,412		$	2,055

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

Great Elm Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Dollar amounts in thousands


	For the nine months ended March 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(10,188	)	$	(7,229	)
Net income from discontinued operations		-			(211	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		6,491			6,481
Stock-based compensation		2,220			1,330
Sales of investments by Consolidated Funds		24,523			4,130
Purchases of investments by Consolidated Funds		(11,687	)		(29,365	)
Stock dividends received		(193	)		(1,868	)
Unrealized loss on investments from Consolidated Funds		218			-
Realized loss on investments from Consolidated Funds		61			-
Unrealized loss on investments		4,402			490
Realized (gain) loss on investments		653			(257	)
Non-cash interest and amortization of debt issuance costs		1,128			946
Loss on extinguishment of debt		-			1,866
Deferred tax benefit related to continuing operations		(96	)		(3	)
Other non-cash expense, net		1,585			1,188
Gain on sale of equipment held for rental		(185	)		(292	)
Change in fair value of contingent consideration		(380	)		-
Changes in operating assets and liabilities:
Related party receivable		177			(418	)
Accounts receivable		234			1,445
Inventories		117			496
Prepaid assets, deposits, and other assets		3,297			(2,662	)
Operating leases		(1,634	)		(1,201	)
Deferred revenues		(3,018	)		(278	)
Accounts payable, accrued expenses and other liabilities		(2,317	)		2,307
Net cash provided by (used in) operating activities-continuing operations		15,408			(23,105	)
Net cash provided by operating activities-discontinued operations		-			1,803
Net cash provided by (used in) operating activities		15,408			(21,302	)
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(1,350	)		(748	)
Purchases of investments		(165	)		(75	)
Sales of investments		187			35
Participation in related party rights offering		-			(8,751	)
Purchases of equipment held for rental		(4,288	)		(4,613	)
Proceeds from sale of equipment held for rental		1,187			862
Purchases of property and equipment		(97	)		(71	)
Net cash used in investing activities-continuing operations		(4,526	)		(13,361	)
Net cash used in investing activities		(4,526	)		(13,361	)

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

Great Elm Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

Dollar amounts in thousands


	For the nine months ended March 31,
	2022			2021
Cash flows from financing activities:
Principal payments on revolving line of credit		-			(3,900	)
Principal payments on related party notes payable		-			(25,105	)
Principal payments on equipment financing debt		(3,884	)		(3,440	)
Proceeds from equipment financing debt		4,554			2,901
Capitalized issuance costs		-			(1,250	)
Due to broker of Consolidated Funds		(12,257	)		12,060
Repurchases of interests in subsidiary		(43	)		(68	)
Payments of debt extinguishment costs		-			(1,627	)
Dividends paid to non-controlling interest holders of DME Inc.		-			(368	)
Issuance of Forest preferred stock		-			35,010
Proceeds from sale of Forest common stock, gross		-			2,700
Redemption of non-controlling interests in Consolidated Funds		(912	)		-
Capital contributions from non-controlling interests in Consolidated Funds		24			3,275
Net cash provided by financing activities-continuing operations		(12,518	)		20,188
Net cash used in financing activities-discontinued operations		-			(1,723	)
Net cash provided by financing activities		(12,518	)		18,465
Net decrease in cash and cash equivalents		(1,636	)		(16,198	)
Cash and cash equivalents at beginning of period		24,382			40,500
Cash and cash equivalents at end of period	$	22,746		$	24,302

Cash paid for interest	$	2,510		$	2,231

Non-cash investing and financing activities
Lease liabilities and right of use assets arising from operating leases	$	300		$	426
Contingent consideration		497			397
Distribution of HC LLC preferred stock to non-controlling interest holders of DME Inc.		-			1,608
Repurchase of GP Corp. Note		-			3,072
Issuance of convertible notes		-			2,250

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

Great Elm Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2022

1. Organization

Great Elm Group, Inc. (referred to as the Company or GEG) is a holding company incorporated in Delaware. The Company currently has two business operating segments: durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations. The Company is pursuing business development opportunities in durable medical equipment, investment management and other industries.

Investment Management

On September 27, 2016, the Company’s wholly-owned SEC-registered investment advisor subsidiary Great Elm Capital Management, Inc. (GECM), a Delaware corporation, entered into an investment management agreement (the IMA) with Great Elm Capital Corp. (GECC), a publicly-traded business development company incorporated in Maryland.

On November 3, 2016, Full Circle Capital Corporation merged with and into GECC and GECM hired the employees of MAST Capital Management, LLC (MAST Capital), a Delaware limited liability company, to manage the assets of GECC.

Durable Medical Equipment

On September 7, 2018, the Company, through its majority-owned subsidiary, Great Elm DME Holdings, Inc. (DME Holdings), acquired an 80.1% equity interest in Great Elm DME, Inc. (DME Inc.) an entity formed to acquire and combine two companies, Valley Healthcare Holding, LLC and Northwest Medical, LLC., which both specialize in the distribution of respiratory care equipment, including primarily positive air pressure equipment and supplies, ventilators and oxygen equipment and operate in Arizona, Nebraska Oregon, Washington and Alaska. The Company has subsequently expanded its durable medical equipment business to Kansas, Iowa, and Missouri through acquisitions in 2019 and 2021.

On May 31, 2021, our wholly-owned subsidiary DME Holdings exchanged their 80.1% interests in DME Inc. for an identical 80.1% direct interest in DME Inc.’s subsidiary Great Elm Healthcare, LLC (HC LLC), which is the sole owner of the durable medical equipment operating subsidiaries. Following the consummation of the taxable reorganization, the Company no longer has an interest in DME Inc.

General Corporate

On December 29, 2020, the Company completed a reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG”. Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended. The Holding Company Reorganization (as defined in Note 6 – Related Party Transactions) was a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.

Discontinued Operations

We launched our real estate business in March 2018 with an investment of $2.7 million for a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property). The Property was fully-leased, on a triple-net basis, to a single tenant through March 31, 2030. On June 23, 2021, the Company sold its real estate business for $4.6 million in cash.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Wholly-owned subsidiaries include GECM, Great Elm Opportunities GP, Inc. (GEO GP), Great Elm FM Acquisition, Inc. (FM Acquisition), DME Holdings, Great Elm DME Manager, LLC (DME Manager) and Great Elm Capital GP, LLC (GEC GP). Majority-owned subsidiaries (including those divested during the year) include Forest, Great Elm FM Holdings, Inc. (FM Holdings), and HC LLC and its eight wholly-owned subsidiaries. In addition, we have determined that the Company is the primary beneficiary of certain variable interest entities, and therefore the operations of those entities have been included in our consolidated results for the relevant periods.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in the Company’s Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. The condensed consolidated balance sheet as of June 30, 2021, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2021.

All assets and liabilities related to discontinued operations are excluded from the notes unless otherwise noted. In addition, the historical results of the real estate business operating segment have been reflected in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2021 as discontinued operations. See Note 4 – Discontinued Operations.

Use of Estimate

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Included in these estimates and assumptions are items that relate to revenue recognition, recognition of rental income, the valuation of excess and obsolete inventories, depreciable lives of equipment, impairment of long lived tangible and intangible assets, valuation allowance for deferred tax assets, fair value measurements including stock-based compensation and contingent consideration, estimates associated with the application of acquisition accounting, and the value of lease liabilities and corresponding right to use assets. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

Principles of Consolidation

The Company consolidates the assets, liabilities, and operating results of its wholly-owned subsidiaries; majority-owned subsidiaries; and subsidiaries in which we hold a controlling financial interest as of the financial statement date. In most cases, a controlling financial interest reflects ownership of a majority of the voting interests. We consolidate a variable interest entity (VIE) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE.

All intercompany accounts and transactions have been eliminated in consolidation.

Non-controlling interests in the Company’s subsidiaries are reported as a component of liabilities for mandatorily redeemable interests, temporary equity for contingently redeemable interests or permanent equity, separate from the Company’s equity. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. Results of

operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations.

Segments

The Company has two business operating segments: durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations. The Company regularly reviews each segment for purposes of allocating resources and assessing performance.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments with original maturities of 90 days or less at the date of purchase. Cash equivalents consist primarily of exchange-traded money market funds. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured.

Accounts Receivable

Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors), based on the contractual agreements. The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers. Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected. The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers. Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers. The revenue reserves related to constraints on variable consideration were $2.2 million and $2.5 million as of March 31, 2022 and June 30, 2021, respectively. During the three and nine months ended March 31, 2022 and 2021, the Company recognized reductions to revenue of $1.2 million and $3.0 million, and $2.2 million and $4.9 million, respectively, related to such constraints. See Note 3 – Revenue.

The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. There were no material adjustments to revenues made in the nine months ended March 31, 2022 relating to prior periods. Changes in constraints on variable consideration are recorded as a component of net revenues.

The Company generally does not allow returns from customers for reasons not covered under the manufacturer’s standard warranty. Therefore, there is no provision for sales return reserves. The Company does not have significant bad debt experience with Payors, and therefore the allowance for doubtful accounts is immaterial.

As of March 31, 2022 and June 30, 2021, the Company had unbilled receivables of approximately $0.1 million and $0.3 million, respectively, that relate to transactions where the Company has the ultimate right to invoice a Payor under the terms of the arrangement but are not currently billed. These unbilled amounts are included in accounts receivable in the condensed consolidated balance sheets.

Net Income (Loss) per Share

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


	For the three months ended March 31,						For the nine months ended March 31,
(in thousands except per share amounts)	2022			2021			2022			2021
Loss from continuing operations	$	(6,135	)	$	(2,818	)	$	(10,188	)	$	(7,440	)
Income from discontinued operations, net of tax		-			73		$	-		$	211
Net loss	$	(6,135	)	$	(2,745	)	$	(10,188	)	$	(7,229	)
Less: net income (loss) attributable to non-controlling interest, continuing operations		(226	)		(173	)		159			(907	)
Less: net income attributable to non-controlling interest, discontinued operations		-			15			-			45
Net loss attributable to Great Elm Group, Inc.	$	(5,909	)	$	(2,587	)	$	(10,347	)	$	(6,367	)
Weighted average shares basic and diluted:
Weighted average shares of common stock outstanding		26,842			25,757			26,963			25,669
Weighted average shares used in computing income (loss) per share		26,842			25,757			26,963			25,669
Basic and diluted income (loss) per share from:
Loss from continuing operations	$	(0.22	)	$	(0.10	)	$	(0.38	)	$	(0.25	)
Income from discontinued operations		-			0.00			-			0.00
Net loss	$	(0.22	)	$	(0.10	)		(0.38	)		(0.25	)

When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. As of March 31, 2022, the Company had 13,298,887 potential shares of common stock, including 10,139,031 potential shares of Company common stock issuable upon conversion of Convertible Notes and 3,159,856 potential shares issuable upon the exercise of stock options and vesting of restricted stock units and restricted stock awards, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive. As of March 31, 2021, the Company had 13,088,564 potential shares of common stock, including 9,656,616 shares of common stock issuable upon the conversion of the Company Convertible Notes and 3,431,948 potential shares issuable upon the exercise of stock options and vesting of restricted stock units and restricted stock awards, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive.

As of March 31, 2022 and 2021, the Company had an aggregate of 579,423 and 732,909 issued shares, respectively, that are subject to forfeiture by the employee at a nominal price if service and/or performance milestones are not met. The Company does not account for such shares as being outstanding for accounting purposes since they are unvested and subject to forfeiture.

Restrictions on Subsidiary Dividends

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

Concentration of Risk

The Company’s net investment revenue and receivables for the periods presented were primarily attributable to the management of one investment vehicle, GECC. See Note 6 – Related Party Transactions.

The Company’s durable medical equipment revenue and related accounts receivable are concentrated with third-party Payors. The following table summarizes customer concentrations as a percentage of revenues:


	For the three months ended March 31,		For the nine months ended March 31,
	2022	2021	2022	2021
Government Payor	33%	32%	35%	35%
Third-party Payor	10%	11%	13%	12%

(1)

Revenue concentration percentages have been recast from those previously reported to reflect the presentation of the real estate business within discontinued operations

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


	As of
	March 31, 2022	June 30, 2021
Government Payor	28%	30%
Third-party Payor	19%	14%

Recently Adopted Accounting Standards

Accounting for Convertible Instruments. In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance in ASU 2020-06 is effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU 2020-06 on July 1, 2021 using the full retrospective method.

Prior to adoption, under Accounting Standards Codification 470-20, Debt with Conversion and Other Options ("ASC 470-20"), we had separately accounted for the liability and equity components upon the original issuance of our Convertible Notes in February 2020 due to the existence of a temporary cash conversion feature. Under ASC 470-20, the equity component of the Convertible Notes was recorded as additional paid-in capital within stockholders’ equity on our consolidated balance sheet and generated an original issue discount on the carrying value of the Convertible Notes. As a result, prior to the adoption of ASU 2020-06, we recorded a greater amount of non-cash interest expense as the discounted carrying value is accreted up to their face value over the Convertible Notes term. Under the full retrospective method, the prior period condensed consolidated financial statements have been retrospectively adjusted to reflect the adoption of the accounting standard in those periods. The following tables shows the impact of the adoption on our previously reported financial information:


Consolidated Balance Sheet Impact	As of June 30, 2021
	As Reported(1)			ASU 2020-06 Adjustment			As Adjusted
Liabilities
Convertible notes	$	22,054		$	11,279		$	33,333
Other liabilities		1,070			(155	)		915
Total Liabilities		95,321			11,124			106,445
Stockholders' equity
Additional paid-in-capital		3,319,767			(12,154	)		3,307,613
Accumulated deficit		(3,265,433	)		1,030			(3,264,403	)
Total Great Elm Group, Inc Stockholder's Equity		54,360			(11,124	)		43,236
Total Stockholder's Equity		63,909			(11,124	)		52,785

Consolidated Statement of
Operations Impact	For the three months ended March 31, 2021
	As Reported(1)			ASU 2020-06 Adjustment			As Adjusted
Non-operating expenses
Interest expense	$	(1,534	)	$	173		$	(1,361	)
Net loss from continuing operations
Net loss from continuing operations		(2,991	)		173			(2,818	)
Net loss per share (basic and diluted)		(0.11	)		0.01			(0.10	)

	For the nine months ended March 31, 2021
	As Reported(1)			ASU 2020-06 Adjustment			As Adjusted
Non-operating expenses
Interest expense	$	(4,105	)	$	498		$	(3,607	)
Net loss from continuing operations
Net loss from continuing operations		(7,938	)		498			(7,440	)
Net loss per share (basic and diluted)		(0.27	)		0.02			(0.25	)

(1)

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

Recently Issued Accounting Standards

Current Expected Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which changes the impairment model for financial instruments, including trade receivables from an incurred loss method to a new forward looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical experience, current information and reasonable and supportable forecasts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the potential impact that the adoption of this ASU will have on its consolidated financial statements.

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the United Kingdom Financial Conduct Authority which announced the desire to phase out the use of the London Interbank Offered Rate (LIBOR) by the end of 2021. The provisions provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. If LIBOR ceases to exist, we may need to renegotiate outstanding notes payable outstanding which extend beyond 2021 with the respective counterparties. Adoption of the provisions in ASU 2020-04 are optional and effective from March 12, 2020 through December 31, 2022. We are currently evaluating the impact of this ASU on our financial statements.

3. Revenue

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


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022		2021		2022		2021
Product and Services Revenue
Investment Management
Management Fees	$	779	$	613	$	2,550	$	1,823
Administration and Service Fees		209		115		442		438
		988		728		2,992		2,261
Durable Medical Equipment
Equipment Sales		8,976		7,309		26,674		23,728
Service Revenues		1,383		1,297		4,038		3,635
		10,359		8,606		30,712		27,363

Total product and services revenue	$	11,347	$	9,334	$	33,704	$	29,624

Rental Revenue
Durable Medical Equipment
Medical Equipment Rental Income		5,275		4,511		16,205		14,907
Total rental revenue		5,275		4,511		16,205		14,907

Total	$	16,622	$	13,845	$	49,909	$	44,531

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 gross charge and what we believe we will collect from Payors and from patients. The transaction price therefore is predominantly based on contractual payment rates determined by the Payors. The Company does not generally contract with uninsured customers. We determine our estimates of billing adjustments based upon contractual agreements, our policies and historical experience. While the rates are fixed for the product or service with the customer and the Payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, from the patient customer. The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the Payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments we estimate will not be collected.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. The Company constrains revenue for these estimated adjustments. There were no material changes in estimates recorded in the three and nine months ended March 31, 2022, relating to prior periods.

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

The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not incur contract acquisition costs. The Company does not have any partially or unfilled performance obligations related to contracts with customers. However, during the quarter ended June 30, 2020, the Company applied for and received $4.4 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS) under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. CMS began recoupments during fiscal 2021, leaving a remaining balance of $3.5 million as of June 30, 2021. During the three and nine months ended March 31, 2022, we issued recoupments of $0.7 million and $3.0 million, leaving a remaining balance of $0.5 million as of March 31, 2022. These amounts are included within deferred revenue on the condensed consolidated balance sheet. The Company has no other contract liabilities as of March 31, 2022 or June 30, 2021.

Included in sales and services revenue are unbilled amounts for which the revenue recognition criteria had been met as of period end but were not yet billed to the Payor. The estimate of net unbilled rental revenue recognized is based on historical trends and estimates of future collectability. As of March 31, 2022 and June 30, 2021, net unbilled sales and services revenue is approximately $0.1 million and $0.2 million, respectively, and is included in accounts receivable.

Investment Management Revenue

The Company recognizes revenue from its investment management business at amounts that reflect the consideration to which it expects to be entitled in exchange for providing services to its customer. Investment management revenue primarily consists of fees based on a percentage of assets under management; fees based on the performance of managed assets; and administrative fees. Fees are based on agreements with each investment product and may be terminated at any time by either party subject to the specific terms of each respective agreement.

Management Fees

The Company earns management fees based on the investment management agreements GECM has with GECC and other private funds managed by GECM (collectively, the Funds). The performance obligation is satisfied over time as the services are rendered, since the Funds simultaneously receive and consume the benefits provided as GECM performs services. Management fee rates range from 1% to 1.5% of the management fee assets specified with each agreement. Based on the terms of the specific agreement, management fees may be calculated and billed in advance or in arrears of the period, no less frequently than quarterly. Management fee revenue is recognized over time as the services are provided.

Incentive Fees

The Company earns incentive fees based on the investment management agreements GECM has with GECC and separately managed accounts. Where an investment management agreement includes both management fees and incentive fees, the performance obligation is considered to be a single obligation for both fees. Incentive fees are variable consideration associated with the GECC investment management agreement. Incentive fees are recognized based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements. Incentive fees range from 5.0% to 20.0% of the performance-based metric specified within each agreement. Effective March 31, 2022 the Company unconditionally waived all accrued incentive fees through March 31, 2022, therefore the accrued yet constrained incentive fees is $0.0 million.

Administration and Service Fees

The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimburses GECM for costs incurred in performing administrative functions for GECC. This revenue is recognized over time as the services are performed. Administrative fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.

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 10 to 36 months. In the case of capped rental agreements, title to the equipment transfers to the customer at the end of the contractual rental period. The customer has the right to cancel the lease at any time during the rental period for a subsequent month’s rental and payments are generally billed in advance on a month-to-month basis. Under Topic 842, rental income from operating leases is recognized on a month-to-month basis, based on contractual lease terms when collectability is reasonably assured. Certain customer co-payments are included in revenue when considered probable of payment.

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 nine months ended March 31, 2022, relating to prior periods.

Although invoicing typically occurs at the beginning of the monthly rental period, we recognize revenue from rentals on a daily basis. Since rental agreements can commence at any time during a given month, we defer revenue related to the remaining monthly rental period as of period end. Deferred revenue related to rentals was $0.9 million and $1.0 million as of March 31, 2022 and June 30, 2021, respectively.

Included in rental revenue are unbilled amounts for which the revenue recognition criteria had been met as of period end but were not yet billed to the Payor. Net unbilled rental revenue is recognized to the extent payment is probable. As of March 31, 2022 and June 30, 2021, net unbilled rental revenue is approximately $0.04 million and $0.1 million, respectively, and is included in accounts receivable.

4. Discontinued Operations

On June 23, 2021, the Company’s majority-owned indirect subsidiary FM Acquisition, entered into an agreement with Monomoy Properties Fort Myers, LLC (Monomoy FM) to sell the Company’s real estate business to Monomoy FM. Pursuant to the terms of the Purchase Agreement, the proceeds of the sale were subsequently reinvested in newly issued membership interests of Monomoy Properties, LLC (Monomoy Properties), a privately-held fund comprised of a portfolio of net leased industrial real estate assets.

The sale of the real estate business, which has historically been disclosed as its own reportable segment, represents a strategic shift away from the direct ownership and operation of real estate properties. Accordingly, our historical financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations. As a passive investor in Monomoy Properties and with a membership interest of approximately 5%, we have determined that we have no significant continuing involvement with the real estate business.

The following table provides a reconciliation of the Company’s net income from discontinued operations presented in the consolidated statements of operations:


	For the three months ended March 31,		For the nine months ended March 31,
(in thousands)	2021		2021
Discontinued operations:
Real estate rental revenue	$	1,276	$	3,824

Real estate expenses		128		380
Depreciation and amortization		430		1,291
Interest expense		645		1,942
Net income from discontinued operations	$	73	$	211

5. Acquisitions

Acquisition of MedOne Healthcare LLC

On August 31, 2021, through its majority-owned subsidiary, HC LLC, the Company acquired the power mobility assets of MedOne Healthcare LLC (MedOne) high service power mobility provider in Arizona. The acquisition is accounted for as a business combination. The Company expects this acquisition to achieve synergies through integrating these operations into our existing durable medical equipment operations. Operating results of the acquired businesses have been included in the consolidated statements of operations since August 31, 2021.

The purchase consideration was $2.0 million, comprised of $1.25 million paid at closing, $0.25 million of amounts due to seller pending satisfaction of certain indemnification obligations, and $0.5 million representing the acquisition date fair value of contingent consideration. The allocation of the purchase price for MedOne resulted in goodwill of $1.9 million. Goodwill was assigned to the durable medical equipment segment and is attributable primarily to expected synergies and the assembled workforce of the acquired business. All of the goodwill is expected to be deductible for income tax purposes. The presentation of pro forma financial disclosures are not required in connection with the MedOne acquisition.

The contingent consideration arrangement requires the Company to pay up to $1.0 million of additional consideration to the seller if certain revenue thresholds are achieved for each of the 12 month periods ending September 1, 2022, and 2023. The fair value of the contingent consideration arrangement at the acquisition date was $0.5 million. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model include volatility of 23.3% and a discount rate of 10.3%. The contingent consideration is included within accrued expenses and other liabilities in the consolidated balance sheets.

Acquisition of Advanced Medical DME, LLC and PM Sleep Lab, LLC

On March 1, 2021, through its majority-owned subsidiary, DME Inc., the Company acquired Advanced Medical DME, LLC and PM Sleep Lab, LLC (AMPM), providers of sleep testing, positive air pressure, and other respiratory products and services in nine locations throughout Kansas and Missouri. The acquisition is accounted for as a business combination. The Company expects to achieve synergies and costs reductions through integrating these operations into our existing durable medical equipment operations. Operating results of the acquired businesses have been included in the consolidated statements of operations since March 1, 2021.

The purchase consideration was $1.1 million, comprised of $0.4 million paid at closing net of cash acquired, $0.3 placed in escrow for potential satisfaction of certain indemnification obligations, and $0.4 million representing the acquisition date fair value of contingent consideration. The allocation of the purchase price for AMPM resulted in goodwill of $0.7 million and intangible assets, including trade names of $0.4 million. Goodwill was assigned to the durable medical equipment segment and is attributable primarily to expected synergies and the assembled workforce of the acquired business. None of the goodwill is expected to be deductible for income tax purposes. The presentation of pro forma financial disclosures are not required in connection with the AMPM acquisition.

The contingent consideration arrangement requires the Company to pay up to $2.1 million of additional consideration to the seller if certain revenue thresholds are achieved for the 12 months ending September 1, 2022. The fair value of the contingent consideration arrangement at the acquisition date was $0.4 million. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model include volatility of 40.0% and a discount rate of 10.3%. The contingent consideration is included within accrued expenses and other liabilities in the consolidated balance sheets.

6. Related Party Transactions

Related party transactions are measured in part by the amount of consideration paid or received as established and agreed by the parties. Consideration paid for such services in each case is the negotiated value.

Durable Medical Equipment

In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into a term loan (the Corbel Facility) with Corbel Capital Partners SBIC, L.P. (Corbel). Jeffrey S. Serota, a member of the Company’s Board of Directors, serves as Vice Chairman to Corbel Capital Partners. Corbel previously held an interest in one of our acquired durable medical equipment businesses and was one of the sellers in our acquisition of the business. As a result of the acquisition, at March 31, 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 (as defined below), the Corbel Facility was repaid early on December 29, 2020, and DME Inc. paid a deferred structuring fee as well as a prepayment penalty. See Note 12 - Borrowings for additional information on the Corbel Facility and Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

In connection with the acquisition of the durable medical equipment businesses, the Company issued non-controlling interests in DME Inc. to the former owners, including Corbel discussed above. These non-controlling interests in DME Inc. became non-controlling interests in HC LLC in May 2021. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiary.

Investment Management

The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC and other investment products. Under these agreements, GECM receives administrative fees, management fees based on the managed assets (other than cash and cash equivalents) and incentive fees based on the performance of those assets. Additionally, GECM has agreements with portfolio companies of GECC in which it receives service fees for such services. See Note 3 – Revenue for additional discussions of the fee arrangements.

The Company’s wholly-owned subsidiary, GEO GP, serves as the general partner of Great Elm Opportunities Fund I, LP (GEOF), a Delaware multi-series limited partnership. GECM serves as the investment manager of GEOF. As the general partner, GEO GP provides administrative services and oversees GECM’s management of the investment portfolio of GEOF. The Company’s wholly-owned subsidiary, GECM, serves as the managing member of Great Elm SPAC Opportunity Fund, LLC (GESOF), and provides administrative services and manages the investment portfolio of GESOF.

The Company has determined that GEOF, each series of GEOF and GESOF are VIEs and that the criteria for consolidation are met for 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.

The Company has retained the specialized investment company accounting guidance under GAAP with respect to the Consolidated Funds. As such, investments of the Consolidated Funds are included in the condensed consolidated balance sheets at fair value and the net unrealized gain (loss) on those investments is included as a component of other income on the condensed consolidated income statement. Non-controlling interests in these Consolidated Funds are included in net loss attributable to non-controlling interest. As of March 31, 2022 no single issuer or investment of the Consolidated Funds had a fair value greater than 5% of the Company’s total consolidated assets.

Additionally, the Company receives dividends from its investment in GECC and earns unrealized profits and losses based on the mark-to-market performance of its investment in GECC. See Note 7 – Fair Value Measurements.

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


	For the three months ended March 31,						For the nine months ended March 31,
(in thousands)	2022			2021			2022			2021
Net (loss) income on investments	$	(3,474	)	$	(1,112	)	$	(5,838	)	$	(454	)
Net (loss) income on investments of Consolidated Funds		(284	)		155			(279	)		221
Dividend income		549			554			1,651			2,400


	As of
(in thousands)	March 31, 2022		June 30, 2021
Dividends receivable	$	-	$	554
Investment management revenues receivable		1,010		936
Receivable for reimbursable expenses paid		286		297

Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets. Outstanding receivables from the Consolidated Funds are eliminated in consolidation. As of March 31, 2022, the Company had $0.1 million in receivable for reimbursable expenses paid on behalf of the Consolidated Funds.

The Company is the owner of approximately 20.4% of the outstanding shares of GECC, valued at $13.4 million as of March 31, 2022. Certain officers and directors of the Company are also officers and directors of GECC. Matthew A. Drapkin is a director of our Board and also the Chairman of the GECC Board, and Adam M. Kleinman is our President and Chief Operating Officer as well as the Chief Compliance Officer of GECC.

As of March 31, 2022 MAST Capital is the beneficial owner of approximately 7.3% of the Company’s outstanding common stock and $2.3 million in Convertible Notes (as defined below). See Note 13 – Convertible Notes for additional discussion of the Convertible Notes.

In October 2020, GECM entered into a shared personnel and reimbursement agreement with Imperial Capital Asset Management, LLC (ICAM). Jason W. Reese, the Executive Chairman of the Company’s Board of Directors, is the Chief Executive Officer of ICAM. Costs incurred under this agreement relate to human resource, investment management, and other administrative services provided by ICAM employees, for the benefit of the Company, and are included in investment management expenses in the condensed consolidated statement of operations. For the three and nine months ended March 31, 2022, such costs were $0.4 million and $0.7 million, respectively. For the three and nine months ended March 31, 2021, such costs were $0.1 million and $0.2 million. The Company also granted Restricted Stock Awards to an employee of ICAM with a grant date fair value of $0.2 million during the quarter ended December 31, 2021 as additional compensation for consulting services performed under the shared personnel and reimbursement agreement with ICAM.

General Corporate

On August 31, 2021, the Company entered into a financial advisory agreement with Imperial Capital, LLC. Jason W. Reese, the Executive Chairman of the Company’s Board of Directors, is an Executive Committee Member of Imperial Capital, LLC. The agreement included a retainer fee of $0.1 million which was paid during the current fiscal period as well as certain success-based fees related to potential future transactions.

Additionally, the Company receives dividends from its investment in Monomoy Properties and earns unrealized profits and losses based on the mark-to-market performance of its underlying assets in Monomoy Properties. Monomoy Properties is managed by ICAM. The following tables summarize activity between Monomoy Properties and the Company:


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022		2021		2022		2021
Net gain on investment	$	266	$	-	$	795	$	-
Dividend income		94		-		288		-
Dividend receivable		96		-		96		-

In conjunction with the JPM Transactions, on December 29, 2020 Forest sold Forest Preferred Stock (as defined below) and the Company sold common stock in Forest to J.P. Morgan Broker-Dealer Holdings Inc. (JPM), a Delaware corporation and affiliate of JPMorgan Chase & Co., for cash consideration of $35.0 million and $2.7 million, respectively. As a result of these transactions, JPM holds a non-controlling interest in Forest. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

On December 18, 2020, the Company purchased from JPM a 21% common stock interest in Ligado Networks, LLC (Ligado), a privately-held Company. The common stock interest does not convey the ability to exercise significant influence over Ligado, and therefore does not require accounting in accordance with the equity method. We have elected to account for this investment, which does not have a readily-determinable fair value, at cost minus impairment. This investment is included in prepaid and other current assets on our consolidated balance sheet.

Holding Company Reorganization

On December 21, 2020, GEC announced plans to create a new public holding company, Great Elm Group, Inc. (the Company) by implementing a holding company reorganization (the Holding Company Reorganization). Following the Holding Company Reorganization, the Company became the successor issuer to GEC.

On December 29, 2020, pursuant to the terms of the Agreement and Plan of Merger, dated as of December 21, 2020, among Forest, the Company and Forest Merger Sub, Inc., a newly created entity for the purpose of facilitating the Merger, (as it may be amended from time to time, the Merger Agreement), the transactions contemplated by the Merger Agreement (the Transactions) were consummated. As a result of the Transactions, and subject to the same terms and conditions as applied immediately prior to the Transactions, each share of Forest's outstanding common stock, common stock options, restricted stock units and restricted shares were exchanged for identical instruments of the Company.

Financing Transaction

Following the consummation of the Holding Company Reorganization, JPM, Forest and the Company agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.

In connection with such financing, among other things:

•

Forest issued to JPM 35,010 newly issued shares of 9.0% preferred stock (the Forest Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share;

•

HC LLC issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to the owners of DME Inc., which in turn distributed such preferred stock pro rata to the holders of its common stock such that 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel, and 9.95% is held by Valley Healthcare Group, LLC (VHG). Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;

•

HC LLC, a wholly-owned subsidiary of DME Inc., and sole owner of the durable medical equipment operating subsidiaries, issued to Forest 34,010 newly issued shares of 9.0% Series A-2 preferred stock (the Series A-2 Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share. Upon a sale of the durable medical equipment business, such holders of Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale;

•

HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;

•

Forest distributed to the Company, its sole stockholder, all of the assets and liabilities of Forest other than certain excluded assets and related liabilities, including Forest’s real estate business, and a preferred investment in the Company’s durable medical equipment business; and

•

JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million. The Company’s wholly-owned subsidiary, DME Manager, concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $0.45 million.

(each collectively noted above, the JPM Transactions).

Using proceeds from the JPM Transactions, DME Inc. paid off the Corbel Facility. See Note 12 – Borrowings.

7. Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

▪

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

▪

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

▪

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below:


	Fair Value as of March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	13,419	$	-	$	-	$	13,419
Equity investments of Consolidated Funds		11,340		-		-		11,340
Total assets within the fair value hierarchy	$	24,759	$	-	$	-	$	24,759
Investments valued at net asset value								5,741
Total assets							$	30,500
Liabilities:
Participation feature of HC LLC Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		388		388
Total liabilities	$	-	$	-	$	388	$	388


	Fair Value as of June 30, 2021
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	19,444	$	-	$	-	$	19,444
Equity investments of Consolidated Funds		26,490		-		-		26,490
Total assets within the fair value hierarchy	$	45,934	$	-	$	-	$	45,934
Investments valued at net asset value								4,600
Total assets							$	50,534
Liabilities:

Participation feature of HC LLC Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		271		271
Total liabilities	$	-	$	-	$	271	$	271

*Balance eliminates in consolidation.

There were no transfers between levels of the fair value hierarchy during the nine months ended March 31, 2022 and 2021.

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


	For the nine months ended March 31,
(in thousands)	2022			2021
Beginning balance	$	271		$	-
Additions		497			397
Change in fair value		(380	)		-
Ending balance	$	388		$	397

The valuation techniques applied to investments held by the Company and by the Consolidated Funds vary depending on the nature of the investment.

Equity and equity-related securities

Securities traded on a national securities exchange are stated at the close price on the valuation date. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level 1.

Investments in private funds

The Company values investments in private funds using net asset value (NAV) as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of FASB Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of March 31, 2022 investments in private funds consist of our investment in Monomoy Properties, an industrial real estate-focused fund, and Sharp Alpha Fund I, LP (Sharp Alpha), a closed-end limited partnership focused on gaming technologies. Monomoy Properties allows redemptions annually with 90 days’ notice subject to a one-year lockup from the date of initial investment. Sharp Alpha does not allow for redemptions. Distributions will be received as the underlying assets are liquidated over the life of the fund, which is expected to be approximately 10 years.

Contingent consideration

In conjunction with the acquisition of AMPM on March 1, 2021, the Company entered into a contingent consideration agreement that requires the Company to pay up to $2.1 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model as of the acquisition date include volatility of 40.0% and a discount rate of 10.3%. The key assumptions in applying the Monte Carlo simulation model as of March 31, 2022 include volatility of 26.8% and a discount rate of 10.3%.

In conjunction with the acquisition of MedOne on August 31, 2021, the Company entered into a separate contingent consideration agreement that requires the Company to pay up to $1.0 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022 and September 1, 2023. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model as of the acquisition date include revenue forecasts, volatility of 23.3% and a discount rate of 10.3%. The key assumptions in applying the Monte Carlo simulation model as of March 31, 2022 include volatility of 25.0% and a discount rate of 10.3%.

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

Participation feature of HC LLC Series A-2 Preferred Stock

On December 29, 2020, in conjunction with the JPM Transactions, the Company issued HC LLC Series A-2 Preferred Stock to our consolidated subsidiary, Forest. See Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries. An embedded derivative was identified in the instrument requiring bifurcation from the host instrument as a derivative to be carried at fair value. The value of the derivative related to a participation feature upon the sale of the durable medical equipment business. As of period end, the fair value of this derivative is determined using an option pricing model based on the estimated value of HC LLC derived from a discounted cash flow income approach and a guideline public company market approach. The key assumptions in applying the valuation approach as of March 31, 2022 include financial forecasts of the durable medical equipment business and a volatility rate of 63.4% (level 3 inputs in accordance with the GAAP fair value hierarchy). The key assumptions in applying the valuation approach as of June 30, 2021 include financial forecasts of the durable medical equipment business, a discount rate of 14.5% and a volatility rate of 50.4%. The fair value of the embedded derivative as of March 31, 2022 and June 30, 2021, was $9.3 million and $5.8 million respectively. Since the HC LLC Series A-2 Preferred Stock are issued to Forest, a consolidated subsidiary, the instruments and their effects on our operations have been eliminated in consolidation and therefore the valuation of the participation feature is reflected as zero within the table above. However, this valuation does impact our segment results and non-controlling interest accounts.

8. Fixed Assets

The Company’s fixed assets consist of its medical equipment held for rental, furniture and fixtures, and leasehold improvements used in its operations. The following tables detail the Company’s fixed assets:


(in thousands)	March 31, 2022			June 30, 2021
Property and Equipment
Leasehold improvements	$	951		$	835
Vehicles		161			172
Computer equipment and software		636			500
Furniture and fixtures		565			422
Sleep study equipment		593			593
		2,906			2,522
Accumulated depreciation		(2,293	)		(1,541	)
Net carrying amount	$	613		$	981

Medical Equipment Held for Rental
Medical equipment held for rental	$	15,349		$	14,933
Accumulated depreciation		(8,539	)		(7,542	)
Net carrying amount	$	6,810		$	7,391

The following table reconciles depreciation expense included in the following lines of the condensed consolidated statements of operations to total depreciation expense for each period presented.


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022		2021		2022		2021
Depreciation and amortization	$	141	$	79	$	436	$	163
Cost of durable medical equipment rentals		1,575		1,478		4,860		4,683
Total depreciation expense	$	1,716	$	1,557	$	5,296	$	4,846

9. Goodwill and Other Intangible Assets

The Company’s durable medical equipment and investment management segments include identifiable intangible assets acquired through acquisitions in prior years. Goodwill presented on the consolidated balance sheets consists only of the goodwill acquired as part of the acquisitions of the durable medical equipment businesses. The Company’s annual impairment assessment date for goodwill and other intangible assets is April 1.

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


	For the nine months ended March 31,
(in thousands)	2022		2021
Beginning balance	$	50,536	$	50,010
Acquisition of businesses		1,927		648
Purchase accounting adjustment		-		-
Ending balance	$	52,463	$	50,658

The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in thousands):


	As of March 31, 2022							As of June 30, 2021
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Durable Medical Equipment
Tradename	$	9,060	$	(3,207	)	$	5,853	$	9,060	$	(2,511	)	$	6,549
Hospital contracts		90		(43	)		47		90		(15	)		75
Non-compete agreements		990		(681	)		309		1,370		(890	)		480
		10,140		(3,931	)		6,209		10,520		(3,416	)		7,104

Investment Management
Investment management agreement		3,900		(2,557	)		1,343		3,900		(2,293	)		1,607
Assembled workforce		526		(345	)		181		526		(309	)		217
		4,426		(2,902	)		1,524		4,426		(2,602	)		1,824

Total	$	14,566	$	(6,833	)	$	7,733	$	14,946	$	(6,018	)	$	8,928


Aggregate Amortization Expense (in thousands)	2022		2021
For the three months ended March 31,	$	376	$	413
For the nine months ended March 31,		1,195		1,261


Estimated Future Amortization Expense (in thousands):
For the three months ending June 30, 2022	$	377
For the year ending June 30, 2023		1,469
For the year ending June 30, 2024		1,267
For the year ending June 30, 2025		1,157
For the year ending June 30, 2026		1,095
Thereafter		2,368
Total	$	7,733

10. Lessor Operating Leases

Medical Equipment Leases

Through its majority-owned subsidiary HC LLC, and the subsidiaries of HC LLC, the Company owns medical equipment which is leased to customers. The Company’s customers consist primarily of patients through their clinical providers including medical centers, clinics and hospices and the Company has lease arrangements with these patients. In addition, the arrangements between the Company and its customers are impacted by arrangements between the Company and Payors. The Payors may cover a portion or all of the rental payments under the agreements between the Company and its customers. The patient is responsible for any residual co-payments.

The lease terms may be for a pre-determined time period, generally 10 months to 36 months; however, the customer may cancel the lease at any time and for any reason without penalty and therefore, the Company treats all leases as month-to-month leases. Upon termination of the lease, the equipment, if not aged beyond its useful life, may be refurbished and subsequently sold or leased to another customer. As the leases are month-to-month, there are no future lease receivables under the terms of the current leases.

11. Lessee Operating Leases

All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets. The following table provides additional details of the leases presented in the balance sheets:


(in thousands)	March 31, 2022			June 30, 2021
Facilities
Right of use assets	$	3,957		$	5,121

Current portion of lease liabilities		1,637			1,864
Lease liabilities, net of current portion		2,546			3,532
Total liabilities	$	4,183		$	5,396

Weighted-average remaining life	3.0 years			3.3 years
Weighted-average discount rate		11.0	%		11.0	%

Vehicles
Right of use assets	$	58		$	87

Current portion of lease liabilities		17			29
Lease liabilities, net of current portion		41			58
Total liabilities	$	58		$	87

Weighted-average remaining life	4.4 years			3.9 years
Weighted-average discount rate		6.5	%		9.8	%

Equipment
Right of use assets	$	9		$	33

Current portion of lease liabilities		9			27
Lease liabilities, net of current portion		-			6
Total liabilities	$	9		$	33

Weighted-average remaining life	0.9 years			1.0 years
Weighted-average discount rate		12.5	%		12.5	%

As of March 31, 2022, the Company had remaining right of use assets of $4.0 million and lease liabilities of $4.3 million (consisting of $1.7 million in current portion of lease liabilities and $2.6 million in lease liabilities, net of current portion on the condensed consolidated balance sheet) related to the leases discussed herein.

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

Certain operating leases include variable lease costs which are not material and are included in operating lease costs. Additional details are presented in the following table:


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022		2021		2022		2021
Facilities
Operating lease cost	$	592	$	559	$	1,717	$	1,638
Cash paid for operating leases		550		527		1,627		1,616

Vehicles
Operating lease cost	$	19	$	23	$	48	$	37
Cash paid for operating leases		15		9		45		23

Equipment
Operating lease cost	$	5	$	12	$	23	$	34
Cash paid for operating leases		5		12		23		34

The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases:


(in thousands)
For the three months ending June 30, 2022	$	611
For the year ending June 30, 2023		1,804
For the year ending June 30, 2024		1,343
For the year ending June 30, 2025		814
For the year ending June 30, 2026		546
Thereafter		128
Total lease payments	$	5,246
Imputed interest		(996	)
Total lease liabilities	$	4,250

Durable Medical Equipment

The facility leases include offices, retail and warehouse space and sleep labs. The leases have original or amended terms ranging from 12 to 96 months, some of which include an additional option to extend the lease for up to 120 months. Certain of these leases have variable rental payments tied to a consumer price index or include additional rental payments for maintenance costs, taxes and insurance, which are accounted for as variable rent.

The vehicles leases have original lease terms of 60 months from the commencement date of each lease with no option to extend. Each lease may be terminated by the lessee with 30-days’ notice after the first 13 months of the lease subject to certain early termination costs, including residual value guarantees. The lease costs include variable payments for taxes and other fees.

Equipment leases consist of office equipment with original lease terms ranging from 36 to 48 months from the commencement date of each lease and may include an option to extend or purchase at the end of the lease term. Certain of these leases include additional rental costs for taxes, insurance and additional fees in addition to the base rental costs.

Investment Management and General Corporate

The Company has a lease for office space located in Waltham, MA. This office space is allocated between the investment management and general corporate segments. On the commencement date of the lease, the non-cancellable term was for eighty-eight months from the occupancy date of June 1, 2017 and contains an option to extend for an additional sixty-month period.

The lease payments commenced on October 1, 2017, four months after the Company began to occupy the space. On an annual basis, the lease payments increase at an average rate of approximately 2.4% from $28 to $32 thousand per month.

12. Borrowings

The Company’s subsidiaries’ outstanding borrowings are summarized in the following table:


(in thousands)	Subsidiaries	March 31, 2022			June 30, 2021
Equipment Financing	DME Inc. and subsidiaries		2,711			2,041
Less current portion of capitalized equipment financing			(2,711	)		(1,974	)
Equipment financing debt, net of current portion		$	-		$	67

The Company incurred interest expense of $0.03 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively. The Company incurred interest expense of $0.9 million and $2.3 million for the nine months ended March 31, 2022 and 2021, respectively.

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


(in thousands)	Principal Due
For the three months ending June 30, 2022	$	1,230
For the year ending June 30, 2023		1,481
Total	$	2,711

Additional details of each borrowing by operating segment are discussed below.

Durable Medical Equipment

The Corbel Facility was assumed in the acquisition of the durable medical equipment businesses in 2018 and was repaid on December 29, 2020. The Corbel Facility was held by Corbel, a related party, which also holds a non-controlling interest in DME Inc. and HC LLC Series A-1 Preferred Stock. See Note 6 – Related Party Transactions and Note 15 – Non-Controlling Interests and Preferred Stock of Subsidiaries.

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


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022		2021		2022		2021
Principal payments	$	-	$	-	$	-	$	25,106
Interest expense		-		-		-		1,296

The Company also assumed a revolving line of credit with Banc of California (formally Pacific Mercantile Bank) (DME Revolver) in the acquisition of the durable medical equipment businesses in 2018. There were no borrowings outstanding under the DME Revolver at March 31, 2022. DME Revolver allows for borrowings up to $10 million, subject to a fixed percentage of qualifying accounts receivables and inventories related to the durable medical equipment business operations. Borrowings under the line of credit are due on November 29, 2022 and accrue interest at a variable rate of the prime rate plus 0.4% per annum. At March 31, 2022 the interest rate was 3.9%. Interest is payable monthly in arrears. The Company has the option to prepay the borrowings without any penalty.

The borrowings under the DME Revolver are collateralized by the assets of the durable medical equipment business and the Company is required to meet certain financial covenants.

The DME Revolver includes covenants that restrict HC LLC’s and its subsidiaries’ business operations to the current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions. Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of HC LLC. HC LLC and its subsidiaries on a consolidated basis must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the HC LLC EBITDA levels. The obligations under the DME Revolver are non-recourse to the Company.

HC LLC’s operating subsidiaries also utilize equipment financing debt to fund certain inventory and equipment purchases from suppliers. These equipment financing debt agreements are entered into with third party banks and are generally payable in equal installments over terms of one to three years, depending on the nature of the underlying purchases being financed. The debt is secured by the inventory and equipment, as applicable, of the operating subsidiaries entering into the agreements, and the long-term agreements have implicit interest rates between 7 – 8%. During the nine months ended March 31, 2022 and 2021, the Company financed $4.6 million and $3.6 million, respectively, in inventory and equipment through such financing agreements.

Investment Management

As part of the entry into the investment management business, the Company acquired certain assets from MAST Capital and in consideration for those assets, Great Elm GECC GP Corp. (GP Corp.) issued a senior secured note payable (the GP Corp. Note). The GP Corp. Note matures in November 2026, accrues interest at a variable rate of three-month LIBOR plus 3.0% per annum and is secured by a profit sharing agreement related to GECM’s management of GECC. On March 10, 2021, GEG purchased the GP Corp. Note as well as non-controlling interests in GP Corp. and certain board appointment rights from MAST Capital. In exchange, GEG issued $2.3 million of Convertible Notes. As MAST Capital is a related party, no gain was recorded on the transaction. The difference in carrying value between the instruments purchased (including the GP Corp. Note and MAST Capital’s non-controlling interests) and that of the newly issued convertible notes was treated as a capital contribution and recorded to additional paid in capital in the amount of $0.6 million.

Payments and interest expense incurred on the GP Corp. Note are summarized in the following table:


	For the three months ended March 31,				For the nine months ended March 31,
(in thousands)	2022(1)		2021		2022(1)		2021
Principal payments	$	-	$	-	$	-	$	-
Interest expense		-		22		-		73

(1) Principal and interest amounts incurred after GEG’s purchase of the GP Corp. note are not reported in this table, as they eliminate in consolidation.

13. Convertible Notes

As of March 31, 2022 the total principal balance of Convertible Notes outstanding was $35.2 million including cumulative interest paid-in-kind. The convertible notes (Convertible Notes) are held by a consortium of investors, including $16.6 million issued to certain related parties. Such Convertible Notes issued to related parties include:

▪

$6.6 million issued to entities associated with Matthew A. Drapkin, including funds managed by Northern Right Capital Management, L.P. (Northern Right), a significant shareholder. Mr. Drapkin, a member of the Company’s Board of Directors, is the Chief Executive Officer of Northern Right.

▪

$7.0 million issued to entities associated with Jason W. Reese, including funds managed by ICAM, a significant shareholder. Mr. Reese is the executive chairman of the Company’s Board of Directors.

▪

$0.7 million issued to entities associated with Eric J. Scheyer, a member of the Company’s Board of Directors.

▪

$2.3 million issued to MAST Capital, owner of 7.3% of our outstanding company stock.

The Convertible Notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and December 31, commencing June 30, 2020, in cash or in kind at the option of the Company. Each $1,000 principal amount of the Convertible Notes are convertible into 288.0018 shares of the Company’s common stock, subject to the terms therein, prior to maturity at the option of the holder.

The Company may, subject to compliance with the terms of the Convertible Notes, effect the conversion of some or all of the Convertible Notes into shares of common stock, subject to certain liquidity and pricing requirements, as specified in the Convertible Notes.

The embedded conversion feature in the Convertible Notes qualifies for the scope exception to derivative accounting in ASC Topic 815, Derivatives and Hedging, for certain contracts involving a reporting entity’s own equity. The Company incurred $1.2 million in issuance costs on the original issuance. The debt issuance costs are being amortized over the 10-year Convertible Notes term and are netted with the principal balance within convertible debt on our condensed consolidated balance sheet.

The Company incurred interest expense of $0.4 million and $1.3 million, respectively, for the three and nine months ended March 31, 2022. During the three and nine months ended March 31, 2021 the company incurred interest expense of $0.4 million and $1.2 million, respectively, related to the convertible notes, inclusive of non-cash interest related to amortization of discount.

14. CARES Act

On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded certain benefits made available under the enhanced Coronavirus Aid, Relief, and Economic Security Act, including modifying and extending the Employee Retention Credit (ERC). As modified, the ERC provides eligible employers with less than 500 employees a refundable tax credit against the employer’s share of social security taxes. The ERC is equal to 70% of qualified wages paid to employees during calendar 2021 for a maximum credit per employee of $7,000 per employee for each calendar quarter through September 30, 2021. In addition to claiming ERC’s during the prior fiscal year, the Company claimed ERCs of $2.4 million during the nine months ended March 31, 2021.

We have accounted for such proceeds as in-substance government grants by analogizing to International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance.

15. Non-Controlling Interests and Preferred Stock of Subsidiaries

Non-Controlling Interests of Subsidiaries

Holders of non-controlling interests in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity or permanent equity. The following table summarizes the non-controlling interests of subsidiary balances on the condensed consolidated balance sheets:


(in thousands)	March 31, 2022		June 30, 2021
HC LLC
Temporary equity	$	2,262	$	2,639
Permanent equity		2,262		2,639
Total HC LLC		4,524		5,278
GEC GP
Permanent equity		-		(79	)
Consolidated Funds
Permanent equity		3,648		4,228
Forest
Permanent equity		3,827		2,761
Total Non-controlling interests	$	11,999	$	12,188

The following table summarizes the net income (loss) attributable to the non-controlling interests on the condensed consolidated statements of operations:


	For the three months ended March 31,						For the nine months ended March 31,
(in thousands)	2022			2021			2022			2021
DME Inc.
Temporary equity	$	-		$	(509	)	$	-		$	(846	)
Permanent equity		-			(509	)		-			(846	)
Total DME Inc.		-			(1,018	)		-			(1,692	)
HC LLC
Temporary equity		(686	)		-			(377	)		-
Permanent equity		(686	)		-			(377	)		-
Total HC LLC		(1,372	)		-			(754	)		-
GP Corp.
Permanent equity		-			(26	)		-			(86	)
GEC GP
Permanent equity		(3	)		-			(7	)		-
Consolidated Funds
Permanent equity		(95	)		(148	)		(146	)		(148	)
Forest
Permanent equity		1,244			1,019			1,066			1,019
FM Holdings
Permanent equity		-			15			-			45
Total	$	(226	)	$	(158	)	$	159		$	(862	)

HC LLC and DME Inc.-Non-Controlling interest classified as temporary equity

In connection with the acquisition of the durable medical equipment businesses in September 2018, the Company issued a 9.95% common stock equity ownership in DME Inc. The holder of the interest has a board observer rights for the DME Inc. board of directors, but no voting rights. DME Inc. has the right of first offer if the holder desires to sell the security and in the event of a sale of DME Inc., the holder must sell their securities (drag along rights) and has the right to participate in sales of DME Inc. securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder owns 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of DME Inc. has not commenced and (iii) the holder has not had an earlier opportunity to sell its shares at their fair market value, the holder has the right to request a marketing process for a sale of DME Inc. and has the right to put its common shares to DME Inc. at the price for such shares implied by such marketing process. The Company also has the right to call the holder’s common shares at such price. The holder of the non-controlling interest is entitled to participate in earnings of DME Inc. and is not required to fund losses. As the redemption is contingent upon future events outside of the Company’s control which are not probable, the Company has classified the non-controlling interest as temporary equity and its fair value on the date of issuance, adjusted for any earnings in DME Inc.

As a result of the reorganization discussed in Note 6- Related Party Transactions the non-controlling interests in DME Inc. became non-controlling interests in HC LLC on May 31, 2021.

The holder of this non-controlling interest, Corbel, is also the holder of the Series A-1 Preferred Stock and previously was the holder of the Corbel Facility. See Note 6 – Related Party Transactions and Note 12 – Borrowings.

HC LLC and DME Inc.-Non-controlling interest classified as permanent equity

In connection with the acquisition of the durable medical equipment businesses in September 2018, the Company issued one of the former owners, a 9.95% common stock equity ownership in DME Inc. The rights are consistent with the non-controlling interest classified as temporary equity, other than the holder does not have a contingent put right. Accordingly, Company has classified the non-controlling interest as permanent equity at its fair value on the date of issuance, adjusted for any earnings in DME Inc.

As a result of the reorganization discussed in Note 6- Related Party Transactions the non-controlling interests in DME Inc. became non-controlling interests in HC LLC on May 31, 2021.

GP Corp. – Non-controlling interest classified as permanent equity

In connection with the acquisition of the investment management business in November 2016, the Company issued certain affiliates and employees of the Company a 19.9% interest in GP Corp. During the year ended June 30, 2021, the Company repurchased 18.1% of such interests, leaving a 1.8% non-controlling interest in GP Corp. as of June 30, 2021. The Company’s 98.2% interest in GP Corp. was then exchanged for a direct interest in GP Corp.’s wholly-owned subsidiary, GEC GP. Following the consummation of the reorganization on June 29, 2021, the Company no longer has an interest in GP Corp.

GEC GP – Non-controlling interest classified as permanent equity

As described above, on June 29, 2021, the Company exchanged its 98.2% interest in GP Corp. for an identical 98.2% direct interest in GP Corp.’s wholly-owned subsidiary, GEC GP. GEC GP owns the rights to the Profit Sharing Agreement with GECM as well as an intercompany obligation under the GP Corp. Note. During the quarter

ended March 31, 2022, the Company purchased the remaining shares of in GEC GP. As of March 31, 2022, no non-controlling interest is outstanding.

Forest – Non-controlling interest classified as permanent equity

In connection with the JPM Transactions on December 29, 2020, the Company sold JPM a 20.0% common stock interest in Forest in exchange for $2.7 million. JPM has a representative on the Forest board of directors and the right to designate a number of directors commensurate with their common stock ownership interest. Forest has the right of first offer if the holder desires to sell the security and in the event of a sale of Forest, the holder must sell their securities (drag along rights) and has the right to participate in sales of Forest securities (tag along rights). The holder of the non-controlling interest is entitled to participate in earnings of Forest and is not required to fund losses.

The holder of this non-controlling interest, JPM, is also the holder of Forest Preferred Stock discussed below. See Note 6 – Related Party Transactions.

Consolidated Funds – Non-controlling interest classified as permanent equity

As of March 31, 2022, the Company held 71.7% of the capital in the Consolidated Funds. The remaining capital in the Consolidated Funds is recorded as a non-controlling interest. These non-controlling interests include affiliated individuals and entities.

FM Holdings – Non-controlling interest classified as permanent equity

In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a 19.9% interest in FM Holdings. The real estate business was sold in June 2021. See Note 4 – Discontinued Operations.

Redeemable Preferred Stock of Subsidiaries

The following table summarizes the preferred stock of subsidiary balances on the condensed consolidated balance sheets (in shares):


	Balance, as of June 30, 2021		Issuance of Preferred Stock		Redemption of Preferred Stock		Balance, as of March 31, 2022
HC LLC
Series A-1 Preferred Stock		10,090		-		-		10,090
Series A-2 Preferred Stock		34,010		-		-		34,010
Total HC LLC		44,100		-		-		44,100
Forest
Forest Preferred Stock		35,010		-		-		35,010
Total		79,110		-		-		79,110

There was no preferred stock activity during the nine months ended March 31, 2022 or 2021.

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

In connection with the JPM Transactions, the Company issued 10,090 shares of Series A-1 Preferred Stock with a face value of $1,000 per share at issuance. The shares were issued pro-rata to the stockholders of DME Inc. in the form of a distribution and no consideration was provided in exchange for such instruments. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on the earlier of certain redemption events or December 29, 2027. The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of Company at a redemption price equal to face value. The shares rank senior and have preference to the common shares of HC LLC. The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights.

As the shares of Series A-1 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations.

The fair value of each share of Series A-1 Preferred Stock on the issuance date was determined to be $801 per share. The difference between the fair value and the redemption value of $1,000 per share as well as debt issuance costs of $0.2 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7-year period to redemption using the effective interest method.

The holders of the Series A-1 Preferred Stock include our majority-owned consolidated subsidiary Forest (8,082 shares), as well as Corbel and VHG (each 1,004 shares), who are also the holders of non-controlling interests in DME Inc. discussed above. See Note 6 – Related Party Transactions. Such shares of Series A-1 Preferred Stock issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation.

HC LLC Series A-2 Preferred Stock classified as a liability

In connection with the JPM Transactions, the Company issued 34,010 shares of Series A-2 Preferred Stock with a face value of $1,000 per share at issuance. The shares were issued to Forest in exchange for cash equal to the face value of such shares. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The shares rank senior and have preference to the common shares of HC LCC. The shares are non-voting and contain standard protective rights. In addition, upon a sale of the durable medical equipment business, the holders of HC LLC Series A-2 Preferred Stock are entitled to the greater of their liquidation preference or 33% of proceeds arising from such sale.

As the shares of Series A-2 Preferred Stock are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the shares are included in interest expense in the consolidated statement of operations.

We have identified the feature allowing holders of the HC LLC Series A-2 Preferred Stock to participate in up to 33% of proceeds arising from a sale of the durable medical equipment business as an embedded derivative. We have bifurcated this embedded derivative from the mandatorily redeemable preferred stock host and have recorded the derivative liability at fair value. The fair value of the derivative liability on the issuance date was $6.5 million, and will be marked to fair value at each reporting date going forward. The fair value of each share of Series A-2 Preferred Stock on the issuance date was determined to be $810 per share. The difference between the fair value and the redemption value of $1,000 per share as well as debt issuance costs of $1.1 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7-year period to redemption using the effective interest method.

The holder of the Series A-2 Preferred Stock is our majority-owned consolidated subsidiary Forest. Such shares and related embedded derivatives issued to consolidated subsidiaries and their effects on our operations have been eliminated in consolidation.

Forest Preferred Stock classified as a liability

In connection with the JPM Transactions, Forest issued 35,010 shares of preferred stock in Forest with a face value of $1,000 per share at issuance. The preferred shares were sold to JPM in exchange for cash equal to the face value of such shares. The preferred shares provide for a 9% annual dividend, which is payable quarterly. The preferred shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include the occurrence of an ownership change that triggers an IRC §382 limitation which reduces Forest net operating loss carryforwards to less than $300 million. The preferred

shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The preferred shares rank senior and have preference to the common shares of Forest. The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.

As the preferred shares are mandatorily redeemable at a specified date, the security has been classified as a liability in the consolidated balance sheet. The dividends on the preferred stock are included in interest expense in the consolidated statement of operations.

The fair value of each share of Forest Preferred Stock on the issuance date was determined to equal its face value based on the transaction price. Debt issuance costs of $1.2 million is accounted for as a debt discount and accretion of the discount will be charged to interest expense over the 7-year period to redemption using the effective interest method.

The holder of the Forest Preferred Stock is JPM, who is also the holder of the non-controlling interests in Forest discussed above. See Note 6 – Related Party Transactions.

16. Stockholders’ Equity

Restricted Stock Awards and Restricted Stock Units

In November 2021, the Compensation Committee of the Board of Directors (the Compensation Committee) in its discretion determined that an aggregate of 580,023 performance shares previously awarded to certain employees had vested. These restricted stock awards granted had both performance and service requirements in connection with the formation of the investment management business. The vesting of these awards was subject to a five-year service requirement and an investment management cumulative revenue collection target of $40 million for the five-year period ended November 3, 2021. The discretionary vesting of shares, as determined by the Compensation Committee resulted in a charge to stock-based compensation expense of $0.6 million during the nine months ended March 31, 2022.

In addition, during the three and nine months ended March 31, 2022, the Company granted 543,686 and 748,288, respectively, service-based restricted stock awards, which have various vesting terms between 1-3 years subject to service requirements.

Restricted stock units are subject to service requirements. The Company accounts for forfeitures of the restricted stock units in the period incurred. During the nine months ended March 31, 2022 the Company granted 7,845 and 140,294 shares of restricted stock units to employees and directors, respectively.

The activity of the Company’s restricted stock awards and restricted stock units for the nine months ended March 31, 2022 was as follows:


Restricted Stock Awards and Restricted Stock Units	Restricted Stock (in thousands)			Weighted Average Grant Date Fair Value
Outstanding at June 30, 2021		904		$	3.71
Granted		896			2.14
Vested		(970	)		3.31
Forfeited		(153	)		3.92
Outstanding at March 31, 2022		677		$	2.22

Stock Options

The following table summarizes the Company’s option award activity as of and through March 31, 2022:


Options	Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2021		2,493		$	3.69		4.51	$	-
Options granted		18			2.87		-		-
Exercised		-			-		-		-
Forfeited, cancelled or expired		(32	)		3.81		-		-
Outstanding at March 31, 2022		2,479		$	3.68		3.34	$	-
Exercisable at March 31, 2022		2,229		$	3.68		3.17	$	-
Vested and expected to vest as of March 31, 2022		2,479		$	3.66		3.34	$	-

During the three months ended March 31, 2022 and 2021, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $0.5 million and $0.6 million, respectively. During the nine months ended March 31, 2022 and 2021, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $2.2 million and $1.3 million, respectively.

As of March 31, 2022, the Company had unrecognized compensation costs related to all unvested share awards and options totaling $1.7 million.

During the nine months ended March 31, 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 value of GECC shares awarded for the nine months ended March 31, 2022 was $0.9 million, of which $0.2 million vested immediately, and the balance will vest annually pro-rata over a three year period. Related compensation expense was $0.07 million and $0.4 million for the three and nine months ended March 31, 2022, respectively.

17. Income Tax

As of June 30, 2021, the Company had net operating loss (NOL) carryforwards for federal and state income tax purposes of approximately $952 million and $198 million, respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2022 through 2037. The federal NOL carryforwards generated in fiscal year 2018 or later can be carried forward indefinitely. The California NOL carryforwards of $185 million will expire from 2029 through 2037. The Massachusetts NOL carryforwards of $13 million will expire from 2031 to 2038.

In light of the Company’s history of cumulative operating losses, the Company recorded a valuation allowance for all of its federal and state deferred tax assets, as it is presently unable to conclude that it is more likely than not that the federal and state deferred tax assets in excess of deferred tax liabilities will be realized.

18. Commitments and Contingencies

From time to time, the Company is involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company maintains insurance to mitigate losses related to certain risks. The Company is not a named party in any other pending or threatened litigation that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

19. Segment Information

The Company allocates resources based on two business operating segments: durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations. Activity not allocated to the segments include, but are not limited to, certain investment and financing activities, professional fees, costs associated with being a public company, acquisition costs and costs associated with executive and corporate management departments, including compensation, benefits, rent and insurance.

The following tables illustrate results of operations by segment:


	For the three months ended March 31, 2022
(in thousands)	Durable Medical Equipment			Investment Management			General Corporate			Intercompany Eliminations(1)			Consolidated Total
Revenue:
Total revenue	$	15,634		$	988		$	230		$	(230	)	$	16,622
Operating costs and expenses:
Cost of durable medical equipment sold and services		(4,362	)		-			-			-			(4,362	)
Cost of durable medical equipment rentals		(1,708	)		-			-			-			(1,708	)
Depreciation and amortization		(428	)		(89	)		-			-			(517	)
Non-cash compensation(3)		-			(262	)		(316	)		-			(578	)
Transaction costs(4)		-			-			(92	)		-			(92	)
Other selling, general and administrative		(8,875	)		(1,372	)		(1,287	)		230			(11,304	)
Total operating expenses		(15,373	)		(1,723	)		(1,695	)		230			(18,561	)
Other income (expense):
Interest expense		(1,269	)		(24	)		(1,263	)		1,202			(1,354	)
Other income (expense)		(5,612	)		(3,222	)		7,174			(1,202	)		(2,862	)
Total other income (expense), net		(6,881	)		(3,246	)		5,911			-			(4,216	)
Total pre-tax income (loss)	$	(6,620	)	$	(3,981	)	$	4,446		$	-		$	(6,155	)


	For the three months ended March 31, 2021
(in thousands)	Durable Medical Equipment			Investment Management			General Corporate			Intercompany Eliminations(1)			Consolidated Total
Revenue:
Total revenue	$	13,117		$	728		$	162		$	(162	)	$	13,845
Operating costs and expenses:
Cost of durable medical equipment sold and services		(3,806	)		-			-			-			(3,806	)
Cost of durable medical equipment rentals		(1,657	)		-			-			-			(1,657	)
Depreciation and amortization		(508	)		(109	)		(1	)		-			(618	)
Non-cash compensation(3)		-			(181	)		(435	)		-			(616	)
Transaction costs(4)		(107	)		-			(155	)		-			(262	)
Other general and administrative		(6,023	)		(742	)		(1,380	)		162			(7,983	)
Total operating expenses		(12,101	)		(1,032	)		(1,971	)		162			(14,942	)
Other income (expense):
Interest expense		(1,280	)		(25	)		(1,287	)		1,231			(1,361	)
Other income (expense)		(4,795	)		(403	)		6,026			(1,231	)		(403	)
Total other income (expense), net		(6,075	)		(428	)		4,739			-			(1,764	)
Total pre-tax income (loss)	$	(5,059	)	$	(732	)	$	2,930		$	-		$	(2,861	)


	For the nine months ended March 31, 2022
(in thousands)	Durable Medical Equipment			Investment Management(1)			General Corporate(1)			Intercompany Eliminations(2)			Consolidated Total
Revenue:
Total revenue	$	46,917		$	2,992		$	645		$	(645	)	$	49,909
Operating costs and expenses:
Cost of durable medical equipment sold and services		(12,731	)		-			-			-			(12,731	)
Cost of durable medical equipment rentals		(5,292	)		-			-			-			(5,292	)
Depreciation and amortization		(1,324	)		(306	)		(1	)		-			(1,631	)
Non-cash compensation(3)		-			(1,604	)		(968	)		-			(2,572	)
Transaction costs(4)		(224	)		-			(311	)		-			(535	)
Other selling, general and administrative		(23,634	)		(3,283	)		(3,679	)		645			(29,951	)
Total operating expenses		(43,205	)		(5,193	)		(4,959	)		645			(52,712	)
Other income (expense):
Interest expense		(3,845	)		(72	)		(3,801	)		3,640			(4,078	)
Other income (expense)		(3,468	)		(4,479	)		8,194			(3,640	)		(3,393	)
Total other income (expense), net		(7,313	)		(4,551	)		4,393			-			(7,471	)
Total pre-tax income (loss)	$	(3,601	)	$	(6,752	)	$	79		$	-		$	(10,274	)


	For the nine months ended March 31, 2021
(in thousands)	Durable Medical Equipment			Investment Management(1)			General Corporate(1)			Intercompany Eliminations(2)			Consolidated Total
Revenue:
Total revenue	$	42,270		$	2,261		$	298		$	(298	)	$	44,531
Operating costs and expenses:
Cost of durable medical equipment sold and services		(12,716	)		-			-			-			(12,716	)
Cost of durable medical equipment rentals		(5,193	)		-			-			-			(5,193	)
Depreciation and amortization		(1,433	)		(364	)		(2	)		-			(1,799	)
Non-cash compensation(3)		-			(572	)		(758	)		-			(1,330	)
Transaction costs(4)		(194	)		-			(416	)		-			(610	)
Other selling, general and administrative		(21,822	)		(2,001	)		(3,524	)		298			(27,049	)
Total operating expenses		(41,358	)		(2,937	)		(4,700	)		298			(48,697	)
Other income (expense):
Interest expense		(2,676	)		(76	)		(2,086	)		1,231			(3,607	)
Other income (expense)		(6,631	)		2,166			6,035			(1,231	)		339
Total other income (expense), net		(9,307	)		2,090			3,949			-			(3,268	)
Total pre-tax income (loss)	$	(8,395	)	$	1,414		$	(453	)	$	-		$	(7,434	)

(1)

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

(2)

The Company’s wholly-owned subsidiary, DME Manager, provides advisory services to HC LLC (formerly to DME, Inc.) and receives consulting fees from for those services. DME Manager is part of general corporate operations while HC LLC is part of the durable medical equipment segment. The corresponding expense to HC LLC and revenue to DME Manager are eliminated in consolidation. Beginning December 29, 2020, DME Manager also provides advisory services to Forest and receives a consulting fee from Forest for those services. Both DME Manager and Forest are part of general corporate operations, and the corresponding revenue and expense are eliminated in consolidation. Additionally, Forest owns Series A-1 Preferred Stock and Series A-2 Preferred Stock of HC LLC. Forest is part of general corporate operations while HC LLC is part of the durable medical equipment segment. The corresponding interest expense to HC LLC and interest income to Forest are eliminated in consolidation.

(3)

Non-cash compensation includes stock-based compensation and compensation in the form of stock in portfolio companies held by the Company. Non-cash compensation attributable to the investment management segment is included in investment management expenses in the condensed consolidated statements of operations. Non-cash compensation attributable to the general corporate segment is included in selling, general and administrative expense in the condensed consolidated statements of operations.

(4)

Transaction costs, which consist of legal and other professional services incurred in connection with consummated and unconsummated transactions, are included in selling, general and administrative expense in the condensed consolidated statements of operations.

The following tables illustrate assets by segment:


	As of March 31, 2022
(in thousands)	Durable Medical Equipment		Investment Management		General Corporate		Total
Fixed assets, net	$	7,403	$	19	$	1	$	7,423
Identifiable intangible assets, net		6,209		1,524		-		7,733
Goodwill		52,463		-		-		52,463
Other assets		17,171		30,294		22,381		69,846
Total	$	83,246	$	31,837	$	22,382	$	137,465

	As of June 30, 2021
(in thousands)	Durable Medical Equipment		Investment Management		General Corporate		Total
Fixed assets, net	$	8,349	$	21	$	2	$	8,372
Identifiable intangible assets, net		7,104		1,824		-		8,928
Goodwill		50,536		-		-		50,536
Other assets		21,150		66,907		5,976		94,033
Total	$	87,139	$	68,752	$	5,978	$	161,869

20. Subsequent Events

Monomoy Transaction
On May 4, 2022, GECM entered into an asset purchase agreement with ICAM to acquire the investment management agreement and certain other assets related thereto for Monomoy Properties REIT, LLC (Monomoy REIT), a Maryland real estate investment trust. Monomoy REIT consists of a portfolio of diversified net leased industrial assets in the United States.

The upfront purchase price of $10 million at closing was financed with a combination of (i) newly issued shares of common stock of GEG equal to 4.99% of GEG’s total outstanding shares as of the closing date issued at the 30-calendar day volume-weighted average price ending on April 14, 2022; (ii) $1.25 million shares of common stock of GECC owned by GEG issued at the GECC rights offering price; and (iii) a promissory note with a principal balance equal to $10 million less the sum of the value of the GEG shares and GECC shares.

In addition to the consideration paid at closing, additional consideration of up to $2 million is owed if certain performance targets are met during the first two years following closing Earnout.

The transaction includes a required equity investment into Monomoy REIT of $15 million to fund growth in originations.

The acquisition was unanimously approved by GEG’s independent directors. The transaction was negotiated between an ad hoc committee of independent directors and ICAM.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a holding company seeking to acquire assets and businesses, where our people and other assets provide a competitive advantage. We currently have two business operating segments: durable medical equipment and investment management, with general corporate representing unallocated costs and activity to arrive at consolidated operations.

Our durable medical equipment business specializes in the distribution of respiratory care equipment, including positive air pressure equipment and supplies, ventilators and oxygen equipment, and provides sleep study services.

Our investment management business manages a business development company, Great Elm Capital Corp. (GECC), a credit-focused private fund, Great Elm Opportunities Fund I, LP, a Special Purpose Acquisition Company (SPAC)-focused fund, Great Elm SPAC Opportunity Fund, LLC, and separate accounts for an institutional investor. The combined assets under management of these entities at March 31, 2022 was approximately $224.3 million.

The operations of our general corporate segment encompass our corporate headquarters operations, in addition to management consulting services provided to certain of our subsidiaries.

We continue to explore other opportunities in the durable medical equipment and investment management sectors, as well as opportunities in other areas that we believe provide attractive risk-adjusted returns on invested capital. As of the date of this report, we have not entered into any binding commitments to make additional acquisitions or investments in any of these areas.

As of June 30, 2021, we had $952 million of net operating loss (NOL) carryforwards for federal income tax purposes.

Discontinued Operations

We launched our real estate business in March 2018 with an investment in a majority-interest in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida (collectively, the Property). The Property was fully-leased, on a triple-net basis, to a single tenant through March 31, 2030. In June 2021, we sold the real estate business. Previously reported financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations.

Holding Company Reorganization

On December 29, 2020, Great Elm Group, Inc. (the Company or GEG) completed a reorganization of the Company’s corporate structure (the Holding Company Reorganization), where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, the Company. Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG.” Forest common stock was then delisted from the NASDAQ Global Select Market and subsequently deregistered under Section 12(b) of the Exchange Act. The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.

Following the consummation of the Holding Company Reorganization, J.P. Morgan Broker-Dealer Holdings Inc. (JPM), a Delaware corporation and affiliate of JPMorgan Chase & Co., Forest, the Company and JPM agreed to effect certain transactions pursuant to which JPM provided financing in an aggregate amount of $37.7 million.

In connection with such financing, among other things:

•

Forest issued to JPM 35,010 newly issued shares of 9.0% preferred stock (the Forest Preferred Stock) with a maturity date of December 29, 2027 for $1,000.00 per share;

•

Great Elm Healthcare, LLC (HC LLC) issued 10,090 newly issued shares of 9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock) with a maturity date of December 29, 2027 and face value of $1,000.00 per share to Great Elm DME, Inc. (DME Inc.), which in turn distributed such preferred stock pro rata to the holders of its common stock such that 80.1% of such preferred stock is held by Forest, 9.95% is held by Corbel Capital Partners SBIC, L.P. (Corbel), and 9.95% is held by Valley Healthcare Group, LLC (VHG). Upon a sale of the durable medical equipment business, such holders of Series A-1 Preferred Stock are only entitled to their liquidation preference;

•

HC LLC distributed to the owners of DME Inc. cash of $1.9 million and reimbursed GEG $1.3 million to cover deal costs;

•

JPM acquired 20% of Forest’s common stock for a purchase price of $2.7 million. The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC (DME Manager), concurrently entered into an agreement with Forest to provide advisory services in exchange for annual consulting fees of $0.45 million.

(each collectively noted above, the JPM Transactions).

Using proceeds from the JPM Transactions, DME Inc. paid off the term loan with Corbel (the Corbel Facility).

COVID-19

During the three and nine months ended March 31, 2022, the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic. In particular, the investment management business continues to experience reduced assets under management in our managed portfolios as compared to pre-pandemic levels. COVID-19 may continue to impact such managed portfolios as well as the value of the shares of GECC held by the Company in the future. In addition, COVID-19 may impact our ability to finance and execute new acquisitions or other business opportunities.

The durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups relative to pre-COVID levels, though the demand for these services and products has increased from prior quarters. More significantly however, and indirectly attributable to the COVID-19 pandemic the durable medical equipment industry has been impacted by global supply chain challenges most notably shortages in semiconductor microchips. These shortages have impacted our ability to purchase positive air pressure (PAP) devices during the most recent two quarters in accordance with our normal procurement process. During the quarter ended March 31, 2021, our equipment allotments from key suppliers were not sufficient to keep up with recovering demand, resulting in missed revenue opportunities. The impact of COVID-19 as well as global supply chain challenges continue to evolve and their duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time. However, the Company expects some level of missed revenue opportunities to continue in the near future due to the continually developing supply chain challenges noted above.

The Company prioritizes the health and safety of employees and customers. Beginning in early March 2020, all employees at our corporate headquarters as well as certain employees of DME Inc. moved to a remote-working model. We have since transitioned to a hybrid working model to maximize efficiency while managing risk. In addition, the officers of the Company have maintained regular communications with key service providers, including legal and accounting professionals, other consultants and vendors, noting that those firms have similarly moved to remote-working or hybrid models to the extent possible. Such employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary.

At DME Inc. we invested in virtual patient set-ups which allow our respiratory therapists to interact with patients by video to maintain social distance. DME Inc. has experienced increased operating expenses related to paid employee absences due to COVID-19 illnesses and exposures, costs related to cleaning and disinfecting workspaces, and additional shipping costs for remote set-ups.

We cannot predict the full impact of any existing or new variants of COVID-19 and related supply chain challenges, including their duration and the magnitude of their economic impact, particularly with respect to the travel restrictions, business closures and other quarantine measures imposed on our employees, suppliers and service providers by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our operating companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future. During the nine months ended March 31, 2022, we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 as it relates to recurring transactions, except as follows:

On July 1, 2021 the Company adopted the Financial Accounting Standards Board’s Accounting Standard Update 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under the full retrospective method of adoption, previously reported financial information has been recast to reflect the adoption of this accounting standard in those periods.

Results of Operations

The following discussion reflects the historical performance of our two business operating segments and general corporate.

The following table provides the results of our consolidated operations:


	For the three months ended March 31,									For the nine months ended March 31,
	2022			Percent Change			2021			2022			Percent Change			2021
Revenue:
Total revenue	$	16,622			20	%	$	13,845		$	49,909			12	%	$	44,531
Operating costs and expenses:
Cost of goods sold		(4,362	)		15	%		(3,806	)		(12,731	)		0	%		(12,716	)
Cost of rentals		(1,708	)		3	%		(1,657	)		(5,292	)		2	%		(5,193	)
Other selling, general and administrative		(11,974	)		35	%		(8,861	)		(33,058	)		14	%		(28,989	)
Depreciation and amortization		(517	)		(16	)%		(618	)		(1,631	)		(9	)%		(1,799	)
Total operating expenses		(18,561	)					(14,942	)		(52,712	)					(48,697	)
Operating loss		(1,939	)					(1,097	)		(2,803	)					(4,166	)
Other income (expense):
Interest expense		(1,354	)		(1	)%		(1,361	)		(4,078	)		13	%		(3,607	)
Other income (expense)		(2,862	)		610	%		(403	)		(3,393	)		(1101	)%		339
Total other income (expense), net		(4,216	)					(1,764	)		(7,471	)					(3,268	)
Total pre-tax loss	$	(6,155	)				$	(2,861	)	$	(10,274	)				$	(7,434	)

Revenue

Revenues for the three and nine months ended March 31, 2022 increased $2.8 million and $5.4 million, respectively, as compared to the corresponding periods in the prior year. The increase is primarily attributable to $2.5 million and $4.6 million increases in durable medical equipment revenues for the corresponding periods. The increase reflects revenue contributions from the acquisitions of Advanced Medical DME, LLC and PM Sleep Lab, LLC (collectively, AMPM) in March 2021 and of MedOne Healthcare LLC (MedOne) in August 2021, as well as improvements in revenue reserves resulting from investments in the credit and collections process in the prior year. Investment management revenues also increased $0.3 million and $0.8 million related to increases in assets under management as compared to the prior periods.

Operating costs and expenses

Operating costs for the three and nine months ended March 31, 2022 increased $3.6 million and $4.0 million, respectively as compared to the corresponding periods in the prior year. This increase was primarily attributable to increases of $0.4 million and $1.8 million in other durable medical equipment costs related to the operations of AMPM and MedOne and related transaction and integration costs, and $0.7 million and $2.2 million in investment management expenses primarily related to increased compensation and consulting costs. In addition, the 3 and nine months ended March 31, 2022 include $0 and $2.4 million in Employee Retention Credits claimed during such period under the enhanced Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This compares to $2.3 million in Employee Retention Credits claimed during the three and nine months ended March 31, 2021.

Other income (expense)

Interest expense increased by $0.5 million for the nine months ended March 31, 2022, as compared to the nine months ended March 31, 2021, due to current period interest on the $37.0 million face value externally-held preferred stock in Forest and HC LLC which were issued in December 2020. In conjunction with the issuance of this preferred stock, we extinguished the Corbel Facility which had $24.8 million in principal outstanding on December 29, 2020.

Other income (expense) for the three and nine months ended March 31, 2022 and 2021 primarily consisted of dividend income and net unrealized gains and losses on the Company’s investment in GECC and private funds which is discussed in more detail under “—Investment Management” below.

Durable Medical Equipment Business

The key metrics of our durable medical equipment business include:

▪

Patients and setup growth – which drives revenue growth and takes advantage of scalable operations; and

▪

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The following table provides the results of our durable medical equipment business:


	For the three months ended March 31,									For the nine months ended March 31,
(in thousands)	2022			Percent Change			2021			2022			Percent Change			2021
Revenue:
Total revenue	$	15,634			19	%	$	13,117		$	46,917			11	%	$	42,270
Operating costs and expenses:
Cost of goods sold		(4,362	)		15	%		(3,806	)		(12,731	)		0	%		(12,716	)
Cost of rentals		(1,708	)		3	%		(1,657	)		(5,292	)		2	%		(5,193	)
Transaction costs		-			(100	)%		(107	)		(224	)		15	%		(194	)
Other selling, general and administrative		(8,875	)		47	%		(6,023	)		(23,634	)		8	%		(21,822	)
Depreciation and amortization		(428	)		(16	)%		(508	)		(1,324	)		(8	)%		(1,433	)
Total operating expenses		(15,373	)					(12,101	)		(43,205	)					(41,358	)
Other income (expense):
Interest expense		(1,269	)		(1	)%		(1,280	)		(3,845	)		44	%		(2,676	)
Other expense		(5,612	)		17	%		(4,795	)		(3,468	)		(48	)%		(6,631	)
Total other income (expense), net		(6,881	)					(6,075	)		(7,313	)					(9,307	)
Operating loss:
Total pre-tax loss	$	(6,620	)				$	(5,059	)	$	(3,601	)				$	(8,395	)

Durable Medical Equipment Revenue

For the three months ended March 31, 2022, revenues from the sale of medical equipment and sleep study services were $9.0 million and $2.6 million, respectively, while for the three months ended March 31, 2021, such revenues were $7.3 million and $1.3 million, respectively. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021.

For the nine months ended March 31, 2022, revenues from the sale of medical equipment and sleep study services were $26.7 million and $4.0 million, respectively, while for the nine months ended March 31, 2021, such revenues were $23.7 million and $3.6 million, respectively. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021.

For the three months ended March 31, 2022, rental revenue was $5.3 million as compared to $4.5 million for the three months ended March 31, 2021. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021.

For the nine months ended March 31, 2022, rental revenue was $16.2 million as compared to $14.9 million for the nine months ended March 31, 2021. The increases are primarily attributable to contributions from the acquisitions of AMPM in March 2021 and of MedOne in August 2021.

The results for the three and nine months ended March 31, 2022 were hindered by global supply chain issues which significantly restricted our ability to procure CPAP equipment, resulting in lost revenue opportunities during the periods primarily related to CPAP sales and CPAP rentals. We expect these global supply chain issues to persist in the near term but continue to work with key suppliers to minimize the impact to our business.

Durable Medical Equipment Operating Costs and Expenses

Cost of goods sold includes inventory costs for medical equipment sold and direct costs associated with running sleep study services, including staff compensation to perform the studies and the purchase of supplies used in the studies. Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses. The favorable margins on sales as compared to the prior periods are primarily due to favorable negotiated volume pricing with strategic vendors, as well as $1.0 million and $1.8 million in revenue reserves improvement as compared to the three and nine month periods in the prior year. Margins on rentals as compared to the prior periods have remained consistent, as benefits from lower revenue reserves have been mostly offset by vendor surcharges implemented to address increased costs related to ongoing global supply chain issues.

General and administrative expenses consist of employee-related, facility-related, freight and shipping, information technology and other costs. Such expenses are net of Employee Retention Credits claimed under the CARES Act. For the three months ended March 31, 2022 and 2021, employee-related costs were $6.1 million and $5.7 million, respectively. The increase in employee related costs is primarily due to additional payroll-related costs relating to acquired AMPM and MedOne employees. Facility-related expenses were $0.9 million and $0.8 million, respectively and freight and shipping costs were $0.4 million and $0.5 million, respectively, remaining consistent during the comparable period. Information technology costs were $0.6 million and $0.5 million for the three months ended March 31, 2022 and 2021, respectively, with increases due to the AMPM and MedOne acquisitions. Other costs for the three months ended March 31, 2022 were $1.0 million as compared to $0.9 million in the prior period, primarily related to professional fees. Other costs were benefited in the current period by $0.4 million related to change in fair value of contingent consideration. During the three months ended March 31, 2021, general and administrative expenses at our durable medical equipment business include a benefit of $2.3 million related to Employee Retention Credits claimed during the quarter.

For the nine months ended March 31, 2022 and 2021, general and administrative expenses at our durable medical equipment business include benefits of $2.3 million related to Employee Retention Credits claimed during each period. Employee-related costs were $18.3 million and $16.6 million for the nine months ended March 31, 2022 and 2021, respectively. The increase in employee related costs is primarily due to additional payroll-related costs relating to acquired AMPM and MedOne employees. Facility-related expenses and information technology costs for the nine months ended March 31, 2022 of $2.6 million and $1.8 million, respectively, increased nominally as compared to $2.4 million and $1.6 million in the comparable period due to added facilities and personnel from AMPM. Freight and shipping costs for the nine months ended March 31, 2022 of $1.2 million remained consistent as compared to the prior comparative period. Other costs for the nine months ended March 31, 2022 of $2.2 million decreased as compared to $2.6 million in the comparable period, primarily due to professional fees. Other costs were benefited in the current period by $0.4 million related to change in fair value of contingent consideration.

Transaction costs for the three and nine months ended March 31, 2022 were nominal in the current and corresponding prior periods.

Depreciation and amortization includes the depreciation of fixed assets, excluding depreciation on the equipment held for rental, which is included in the cost of rentals, and amortization of the intangible assets resulting from the acquisition of the durable medical equipment businesses. Depreciation and amortization for the three and nine months ended March 31, 2022 and 2021 decreased slightly as we reduced discretionary capital expenditures during the year.

Durable Medical Equipment Other Expenses

Interest expense remained consistent for the three months ended March 31, 2022 and 2021. The increase in interest expense for the nine months ended March 31, 2022 as compared to the corresponding period in the prior year is attributable primarily to higher outstanding principal balances of the HC LLC preferred stock of $44.1 million as compared to $25.1 million outstanding under the Corbel Facility and DME Revolver (as defined below) prior to the refinancing in December 2020.

During the three and nine months ended March 31, 2022, the Company recognized a $1.4 million and $3.5 million benefit within the durable medical equipment business related to the recurring fair value adjustment of an embedded derivative in the HC LLC Series A-2 preferred stock issued to Forest. This has an off-setting impact in our General Corporate activity and is eliminated in consolidation.

Investment Management Business

The key metrics of our investment management business are:

•

Assets under management ― which provides the basis on which our management fees and performance milestones for vesting of certain equity awards are based; and

•

Investment performance ― on which our incentive fees (if any) are based and on which we are measured against our competition.

The following table provides the results of our investment management business:


	For the three months ended March 31,									For the nine months ended March 31,
(in thousands)	2022			Percent Change			2021			2022			Percent Change			2021
Revenue:
Total revenue	$	988			36	%	$	728		$	2,992			32	%	$	2,261
Operating costs and expenses:
Non-cash compensation		(262	)		45	%		(181	)		(1,604	)		180	%		(572	)
Transaction Costs		-		-%				-			-		-%				-
Other general and administrative		(1,372	)		85	%		(742	)		(3,283	)		64	%		(2,001	)
Depreciation and amortization		(89	)		(18	)%		(109	)		(306	)		(16	)%		(364	)
Total operating expenses		(1,723	)					(1,032	)		(5,193	)					(2,937	)
Other income (expense):
Interest expense		(24	)		(4	)%		(25	)		(72	)		(5	)%		(76	)
Other income (expense)		(3,222	)		700	%		(403	)		(4,479	)		(307	)%		2,166
Total other income (expense), net		(3,246	)					(428	)		(4,551	)					2,090
Operating income (loss):
Total pre-tax income (loss)	$	(3,981	)				$	(732	)	$	(6,752	)				$	1,414

Investment Management Revenue

Investment management revenues include management fees and administrative fees. For the three and nine months ended March 31, 2022 management fees were $0.8 million and $2.7 million, respectively, and administrative fees were $0.2 million and $0.4 million, respectively. For the three and nine months ended March 31, 2021 management fees were $0.6 million and $1.8 million, respectively, while administration fees were $0.1 million and $0.4 million, respectively. The increase in management fees for the three and nine months ended March 31, 2022 as compared to the three and nine months ended March 31, 2021 is attributable to increases in the average assets on which such fees are calculated through growth of GECC and our private fund GESOF, which was launched in February 2021.

Investment Management Costs and Expenses

Non-cash compensation was impacted for the three and nine months ended March 31, 2022 include $0.6 million in charges upon the final discretionary vesting of 5-year performance awards initially granted in November 2016. In addition, the Non-cash compensation expense includes annual awards granted to the investment team in September 2021, whereas no awards were granted to the investment team in the prior year. Other general and administrative costs consist primarily of professional fees, facilities and other overhead costs, and payroll and related costs, excluding stock-based compensation. The increase in general and administrative costs for the three and nine months ended March 31, 2022 of $0.6 million and $1.3 million as compared to the corresponding prior periods, is primarily attributable to an increase in allocated payroll costs, bonus accruals and consulting fees.

Investment Management Other Income (Expense)

Other income and expense primarily consisted of dividend income and net realized and unrealized losses on the Company’s investment in GECC and the net realized and unrealized losses of GEOF Series C and GESOF (the Consolidated Funds). Dividend income from GECC for the three months ended March 31, 2022 and 2021 was $0.6 million and $0.6 million, respectively. Dividend income from GECC for the nine months ended March 31, 2022 and 2021 was $1.7 million and $2.4 million, respectively.

We recognized net realized and unrealized losses on our investment in GECC and the investments of the Consolidated Funds of $3.8 million and $6.1 million for the three and nine months ended March 31, 2022, respectively, as compared to net realized and unrealized gains of $1.0 million and $0.2 million on our investment in GECC and the investments of the Consolidated Funds for the three and nine months ended March 31, 2021. We mark-to-market our investment in GECC and underlying investments of consolidated funds by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end.

Interest expense for the three and nine months ended March 31, 2022 remained consistent with the three and nine months ended March 31, 2021.

General Corporate

The following table provides the results of our general corporate activities:


	For the three months ended March 31,									For the nine months ended March 31,
(in thousands)	2022			Percent Change			2021			2022			Percent Change			2021
Revenue:
Total revenue	$	230			42	%	$	162		$	645			116	%	$	298
Operating costs and expenses:
Non-cash compensation		(316	)		(27	)%		(435	)		(968	)		28	%		(758	)
Transaction costs		(92	)		(41	)%		(155	)		(311	)		(25	)%		(416	)
Other general and administrative		(1,287	)		(7	)%		(1,380	)		(3,679	)		4	%		(3,524	)
Depreciation and amortization		-			(100.00	)%		(1	)		(1	)		(50	)%		(2	)
Total operating expenses		(1,695	)					(1,971	)		(4,959	)					(4,700	)
Other income (expense):
Interest expense		(1,263	)		(2	)%		(1,287	)		(3,801	)		82	%		(2,086	)
Other income		7,174			19	%		6,026			8,194			36	%		6,035
Total other income (expense), net		5,911						4,739			4,393						3,949
Operating income:
Total pre-tax income (loss)	$	4,446					$	2,930		$	79					$	(453	)

General Corporate Revenue

For the three and nine months ended March 31, 2022 and 2021, all revenue was derived from fees earned by DME Manager, which provides consulting services to DME Inc. In addition to this revenue, the three and nine months ended March 31, 2022, revenue includes $0.2 million and $0.6 million, respectively, in fees earned by DME Manager relating to consulting services provided to our consolidated subsidiary, Forest.

General Corporate Costs and Expenses

Our general and administrative costs primarily consisted of professional fees and payroll costs in connection with our general corporate oversight of our subsidiaries and diligence efforts towards identifying asset and business acquisition opportunities. These costs remained relatively consistent for the three and nine months ended March 31, 2022 as compared to prior periods primarily. Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities.

Non-cash compensation, decreased $0.1 million and increased $0.2 million for the three and nine months ended March 31, 2022 as compared to the corresponding periods in the prior year. The increase was due primarily to the election of directors to receive their compensation in the form of shares instead of cash.

Other Income (Expense)

Interest expense for the three and nine months ended March 31, 2022 consists primarily of interest on the convertible notes, as well as on Forest Preferred Stock, which was issued in December 2020. Interest expense remained consistent for the three months ended March 31, 2022, as compared to March 31, 2021, while the increase of $1.7 million in the nine months ended March 31, 2022, as compared to the corresponding period in the prior year is primarily due to the prior year not including interest on the Forest Preferred Stock, as it was not outstanding in the prior period.

Other income (expense) during the three and nine months ended March 31, 2022 is comprised of intercompany interest income of $1.2 million and $3.6 million related to Forest's investments in HC LLC preferred stock, and $0.1 million and $0.8 million in dividends and unrealized gains on our investment in Monomoy Properties, LLC. This amount is partially offset by a $1.4 million and $3.5 million charge related to changes in the valuation of the embedded derivative. Since the preferred stock was issued in December 2020 and Monomoy interests were purchased in June 2021, there is no corresponding activity in the prior year. Except for Monomoy-related income, this other income has corresponding charges in the durable medical equipment business and such impacts are eliminated in consolidation.

Income Taxes

As of June 30, 2021, the Company had NOL carryforwards for federal and state income tax purposes of approximately $952 million and $198 million, respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2022 through 2037. The federal NOL carryforwards generated in fiscal year 2018 or later can be carried forward indefinitely. The California NOL carryforwards of $185 million will expire from 2029 through 2037. The Massachusetts NOL carryforwards of $13 million will expire from 2031 to 2038. The state NOL carryforwards will expire from 2029 through 2038. The Company assesses NOL carryforwards based on taxable income on an annual basis.

Liquidity and Capital Resources

Cash Flows

Cash flows provided by operating activities for the nine months ended March 31, 2022 were $15.4 million. The net cash inflow was primarily the result of $24.5 million in sales of investments by our Consolidated Funds, $5.3 million in realized and unrealized losses on our investments and non-cash inflows of $8.7 million related to stock-based compensation, depreciation and amortization. These inflows were partially offset by our net loss of $10.2 million, and purchases of investments by our Consolidated Funds of $11.7 million.

Cash flows used in operating activities for the nine months ended March 31, 2021 were $21.3 million. The net cash outflow was primarily the result of our net loss of $7.2 million, $29.4 million in purchases of investments made by the Consolidated Funds and $1.9 million of distributions received in stock from the Company’s investment in GECC. These outflows were partially offset by non-cash inflows of $6.5 million related to depreciation and amortization, $4.1 million in sales of investments by our Consolidated Funds.

Cash flows used in investing activities for the nine months ended March 31, 2022 were $4.5 million. The net cash outflow primarily consisted of $1.4 million due to acquisition of MedOne, along with $4.3 million of purchases of capital equipment, partially offset by $1.2 million in proceeds from sale of capital equipment and $0.2 million in sales of investments.

Cash flows used in investing activities for the nine months ended March 31, 2021 were $13.4 million. The net cash outflow primarily consisted of $8.8 million in purchases of investments related to participation in the GECC non-transferable rights offering in October 2020 and $4.6 million in purchases of equipment to be held for rental. These outflows were partially offset by $0.9 million in proceeds from sales of equipment held for rental.

Cash flows used in financing activities for the nine months ended March 31, 2022 were $12.5 million which primarily consisted payments to the broker of our Consolidated Funds of $12.3 million and principal payments on equipment financing debt of $3.9 million. These outflows were partially offset by proceeds from equipment financing debt of $4.6 million.

Cash flows provided by financing activities for the nine months ended March 31, 2021 were $18.5 million which primarily consisted of $35.0 million in gross proceeds from the JPM Transactions, $12.1 million in receipts from the broker of our Consolidated Funds and $2.9 million in proceeds from new equipment financing debt. Such inflows were partially offset by principal payments of $32.4 million on our debt, and debt issuance costs of $1.3 million in connection with the JPM Transactions.

Financial Condition

As of March 31, 2022, we had an unrestricted cash balance of $22.7 million. We also hold 914,111 shares of GECC common stock with an estimated fair value of $13.4 million as of March 31, 2022.

We intend to make acquisitions or investments that we believe will result in the usage of all of our liquid financial resources, or to issue equity securities and to incur indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan.

Borrowings

As of March 31, 2022, the Company had $35.2 million face value in convertible notes outstanding. The convertible notes are held by a consortium of investors, including related parties. The convertible notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and March 31, in cash or in kind at the option of the Company.

The convertible notes are due on February 26, 2030, but are convertible at the option of the holders, subject to the terms therein, prior to maturity into shares of our common stock. Upon conversion of any note, the Company will pay or deliver, as the case may be, to the noteholder, in respect of each $1,000 principal amount of notes being converted, shares of common stock equal to the conversion rate in effect on the conversion date, together with cash, if applicable, in lieu of delivering any fractional share of common stock.

As of March 31, 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’s net operating loss carryforwards to less than $300 million. The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The shares rank senior and have preference to the common shares of Forest. The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.

As of March 31, 2022, Corbel and VHG, both related parties, held a combined $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on the earlier of certain redemption events or December 29, 2027. The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of Company at a redemption price equal to face value. The shares rank senior and have preference to the common shares of HC LLC. The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights.

The HC LLC Series A-1 Preferred Stock includes covenants that limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions. In order to incur certain additional debt, HC LLC must also comply with a leverage ratio and levered free cash flow ratio, which are based in part on the HC LLC EBITDA levels.

The Company has a credit facility with Banc of California that accrues interest at the prime rate plus 0.4% (at March 31, 2022, the effective rate was 3.9%) through maturity on November 29, 2022 (the DME Revolver). The DME Revolver allows for borrowings up to $10 million. The DME Revolver requires monthly interest payments. The DME Revolver is secured by all of the assets of the durable medical equipment business and the Company is required to meet certain financial covenants. The DME Revolver was not drawn as of March 31, 2022.

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 March 31, 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 March 31, 2022, the Company had $2.7 million in equipment financing debt outstanding.

Off-Balance Sheet Arrangements

As of March 31, 2022, we did not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in the market risks discussed in Item 7A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

Item 4. Controls and Procedures.

We evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that the information we are required to disclose in reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of March 31, 2022, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

No changes required to be disclosed.

Item 1A. Risk Factors.

We have disclosed the risk factors affecting our business, financial condition and operating results in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no material changes from the risk factors previously disclosed.

Item 6. Exhibits.

EXHIBIT INDEX

All references are to filings by Great Elm Group, Inc. (the Registrant) with the SEC under File No. 001-39832.

Exhibit

Number Description



2.1		Agreement and Plan of Merger, dated December 21, 2020, by and among Great Elm Capital Group, Inc., Great Elm Group, Inc. and Forest Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on December 29, 2020)

3.1		Certificate of Incorporation of Great Elm Group, Inc., dated October 23, 2020 (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on December 29, 2020)

3.2		Bylaws of Great Elm Group, Inc., dated October 23, 2020 (incorporated by reference to Exhibit 3.2 to the Form 8-K filed on December 29, 2020)

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		Materials from the Great Elm Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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 Great Elm Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in inline XBRL (included as Exhibit 101).

*Filed or furnished herewith.

SIGNATURES

Pursuant to the requirements 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.


	GREAT ELM GROUP, INC.

Date: May 5, 2022	/s/ Peter A. Reed
	Peter A. Reed
	Chief Executive Officer

Date: May 5, 2022	/s/ Brent J. Pearson
	Brent J. Pearson
	Chief Financial Officer