GREAT ELM GROUP, INC. 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 four business operating segments: durable medical equipment, investment management, real estate, and general corporate.
In
Through our investment management business we manage a business development company, Great Elm Capital Corp. (GECC), a credit-focused private fund,Great Elm Opportunities Fund I, LP , and separate accounts for an institutional investor. The combined assets under management of these entities atMarch 31, 2020 was approximately$202.8 million , down from approximately$228.8 million as ofDecember 31, 2019 . See also "-Results of Operations" for further discussion of the investment management business.
Our real estate business, which we launched in
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, investment management and real estate 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
COVID-19
In the quarter endedMarch 31, 2020 , the Company's revenues declined relative to its prior expectations in part due to the impact of the Coronavirus Disease 2019 (COVID-19) pandemic. During the quarter endedMarch 31, 2020 , the Company experienced a decrease in assets under management in our managed portfolios within the investment management business and observed higher patient cancellation rates for attended sleep studies atDME Inc. The impact of COVID-19 continues to evolve and its duration and ultimate disruption to the Company's customers and to its operations cannot be estimated at this time. However, the Company expects to experience decreased referrals in the near future due to these factors. Should the disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business and operations
In addition, COVID-19 may impact our ability to act on new acquisitions or other business opportunities.
The Company prioritizes the health and safety of employees and customers. Beginning in earlyMarch 2020 , all employees at our GEC headquarters as well as certain employees ofDME Inc. moved to a remote-working model. In addition, the officers of GEC have maintained regular communications with key service providers, including legal and accounting professionals, other consultants and vendors, noting that those firms have similarly moved to remote-working models to the extent possible. Such employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary. 41 -------------------------------------------------------------------------------- AtDME Inc. we invested in virtual patient set-ups which allow our respiratory therapists to interact with patients by video to maintain social distance. Certain other employees whose responsibilities have been impacted by social distancing have been temporarily redeployed within the organization. We cannot predict the full impact of the COVID-19 pandemic, including its duration inthe United States and worldwide and the magnitude of the economic impact of the outbreak, particularly with respect to the travel restrictions, business closures and other quarantine measures imposed on our employees, suppliers and service providers by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our operating companies' operating results or the impact that such disruptions may have on our results of operations and financial condition.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (US GAAP). The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future. During the nine months endedMarch 31, 2020 , 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 endedJune 30, 2019 as it relates to recurring transactions.
Results of Operations
The following discussion reflects the historical performance of our four business operating segments. The durable medical equipment segment commenced operations inSeptember 2018 and thus the results of operations for this segment for the nine months endedMarch 31, 2020 presented are not comparable to the corresponding period endedMarch 31, 2019 . We expect that our results of operations in future periods will be adversely impacted by the COVID-19 outbreak and its negative effects on the global economic conditions.
The following table provides the results of our consolidated operations for the
three and nine months ended
For the three months ended March 31, For the nine months ended March 31,
Percent
(in thousands) 2020 Percent Change 2019 2020 Change 2019
Revenue:
Total revenue $ 16,236 15 % $ 14,084 $ 48,158 33 % $ 36,098
Operating costs and
expenses:
Cost of goods sold (3,966 ) 51 % (2,633 ) (11,118 ) 56 % (7,122 )
Cost of rentals (2,072 ) 5 % (1,969 ) (6,522 ) 54 % (4,229 )
Other selling, general
and administrative (10,154 ) 13 % (9,012 ) (29,421 ) 18 % (24,949 )
Depreciation and
amortization (1,053 ) 7 % (987 ) (3,250 ) 29 % (2,525 )
Total operating expenses (17,245 ) (14,601 ) (50,311 ) (38,825 )
Operating income (loss) (1,009 ) (517 ) (2,153 ) (2,727 )
Other income (expense):
Interest expense (1,754 ) 2 % (1,712 ) (5,083 ) 13 % (4,495 )
Other income (expense) (9,303 ) (804 )% 1,322 (9,992 ) (8224 )% 123
Total other expense, net (11,057 ) (390 ) (15,075 ) (4,372 )
Total pre-tax income
(loss) from continuing
operations $ (12,066 ) $ (907 ) $ (17,228 ) $ (7,099 )
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Revenue
For the three and nine months endedMarch 31, 2020 , revenues included$14.1 million and$41.8 million , respectively, from the durable medical equipment businesses,$0.8 million and$2.6 million , respectively, from the investment management business, and$1.3 million and$3.8 million , respectively, from the real estate business. For the three and nine months endedMarch 31, 2019 , revenues included$11.8 million and$29.0 million , respectively, from the durable medical equipment businesses,$2.6 million and$2.9 million , respectively, from the investment management business, and$1.3 million and$4.2 million , respectively, from the real estate business. The increases in revenues for the three and nine months endedMarch 31, 2020 as compared to the corresponding periods in the prior year are primarily attributable to growth in the durable medical equipment businesses which is partially offset in the nine month comparison by decreases in the real estate business resulting from the adoption of a new accounting standard. This adoption impacted the accounting recognition related to certain rental revenues effectiveJanuary 1, 2019 . Although we saw a decline in DME sleep services revenue in March, that did not have a material impact on revenue year over year.
Operating costs and expenses
The increase in operating costs for the three and nine months endedMarch 31, 2020 , as compared to the three and nine months endedMarch 31, 2019 , is primarily attributable to the additional costs associated with the durable medical equipment business, including cost of goods sold and cost of rentals, as well as the general and administrative costs of the durable medical equipment business, depreciation on fixed assets and amortization of the intangible assets associated with the durable medical equipment business. The increase in costs are primarily due to increase in topline sales, along with increase in expenses to enhance scalability of the durable medical equipment business.
Other income (expense)
Interest expense decreased for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 due to the redemption of the 10% preferred stock ofDME Holdings, Inc. inJune 2019 , resulting in no related interest expensed in the current period, however this was partially offset by interest expense for the 5.0% Convertible SeniorPIK Notes due 2030 (the Convertible Notes) which were issued inFebruary 2020 . Interest expense increased for the nine months endedMarch 31, 2020 , as compared to the nine months endedMarch 31, 2019 , due to the fact that borrowings related to our acquisition of the durable medical equipment business were not outstanding untilSeptember 2018 , along with interest expense for the Convertible Notes which were issued inFebruary 2020 . Other income and expense consisted of dividend income and unrealized gains or losses on the Company's investment in GECC and interest income earned on cash balances. The period over period decrease in net other expense is primarily attributable to changes in unrealized losses on the Company's investment in GECC, which is discussed under "-General Corporate" below. 43
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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
? 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, 2020 and 2019 and for nine months
ended March 31, 2020 and the period from the inception of the durable medical
equipment business on September 7, 2018 to March 31, 2019 (the inception
period).
For the three months ended March 31, For the nine months ended March 31,
(in thousands) 2020 Percent Change 2019 2020 Percent Change 2019
Revenue:
Total revenue $ 14,131 20 % $ 11,752 $ 41,753 44 % $ 28,995
Operating costs and
expenses:
Cost of goods sold (3,966 ) 51 % (2,633 ) (11,118 ) 56 % (7,122 )
Cost of rentals (2,072 ) 5 % (1,969 ) (6,522 ) 54 % (4,229 )
Transaction costs - (100 )% (7 ) - (100 )% (551 )
Other selling, general
and administrative (8,113 ) 38 % (5,891 ) (22,721 ) 66 % (13,665 )
Stock-based compensation - - - -
Depreciation and
amortization (472 ) 27 % (371 ) (1,449 ) 87 % (774 )
Total operating expenses (14,623 ) (10,871 ) (41,810 ) (26,341 )
Other income (expense):
Interest expense (906 ) 9 % (998 ) (2,839 ) 20 % (2,365 )
Other income (expense) - - % (400 ) 3 (101 )% (380 )
Total other expense, net (906 ) (1,398 ) (2,836 ) (2,745 )
Operating income (loss):
Total pre-tax income
(loss) from continuing
operations $ (1,398 ) $ (517 ) $ (2,893 ) $ (91 ) Durable Medical Equipment Revenue
Durable medical equipment revenues include revenue from the sale of medical equipment, sleep study services and medical equipment rentals. For the three months endedMarch 31, 2020 , revenues from the sale of medical equipment and sleep study services were$7.5 million and$1.4 million , respectively, compared with the three months endedMarch 31, 2019 , for which such revenues were$6.0 million and$1.4 million , respectively. The increase in sale of medical equipment were due to organic growth within the segment and the asset acquisition inJune 2019 . For the nine months endedMarch 31, 2020 , revenues from the sale of medical equipment and sleep study services were$21.5 million and$4.2 million respectively, while for the inception period endedMarch 31, 2019 such revenues were$15.8 million and$3.4 million , respectively. The increases for the nine months endedMarch 31, 2020 as compared to the inception period endedMarch 31, 2019 are primarily attributable to the acquisition of the durable medical equipment businesses inSeptember 2018 resulting in a shorter period in the prior year. Revenue from medical equipment rentals was$5.2 million for the three months endedMarch 31, 2020 as compared to$4.4 million for the nine months endedMarch 31, 2019 , with the increase attributable to higher volumes of patient setups, as well as the expansion resulting from the acquisition ofMidwest Respiratory Care, Inc. (Midwest). For the nine months endedMarch 31, 2020 , rental revenue was$16.0 million as compared to$9.8 million for the corresponding period in the prior year due to the shorter period in the prior year, along with incremental revenue from increases in patient setups and the acquisition of Midwest. 44 -------------------------------------------------------------------------------- Due to the recent outbreak of COVID-19, we have seen a decline in our sleep study services related to increased patient cancellations of attended sleep studies towards the end of the most recent quarter. Though this did not have a material impact on total revenues for the three and nine months endedMarch 31, 2020 , we expect this decline in referrals to continue into future periods as some local governments have issued advisories or regulations limiting certain non-essential business operations. In addition, a portion of our equipment sales and rentals, are dependent on the availability and accessibility of primary physicians to patients. If patients are unable to access their physicians it may negatively impact our referrals for new patient set-ups.
Durable Medical Equipment Costs and Expenses
Cost of goods sold includes inventory costs for medical equipment sold and direct costs associated with running sleep study services, including staff compensation to perform the studies and the purchase of supplies used in the studies. Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses. The changes in these costs for the three and nine months endedMarch 31, 2020 as compared to the corresponding periods in the prior year are consistent with the changes in the related revenues and sales volumes. General and administrative expenses primarily consist of payroll related costs, facility expenses, including lease costs, and professional fees. For the three months endedMarch 31, 2020 and 2019, payroll related costs were$5.0 million and$4.3 million , respectively, facility expenses were$0.9 million and$0.9 million , respectively, and professional fees were$1.0 million and$0.1 million , respectively. The increases in payroll related costs is due to growth in the business and additional employee hires. The increase in professional fees is largely attributable to consulting costs and investments in technology to integrate the durable medical equipment business into the Company and prepare for future growth and scalability. For the nine months endedMarch 31, 2020 and the inception period endedMarch 31, 2019 , payroll related costs were$9.8 million and$5.6 million respectively, facility expenses were$1.9 million and$1.0 million , respectively, and professional fees were$1.3 million and$0.1 million , respectively. In addition to the factors discussed above, increases in expenses for the nine months endedMarch 31, 2020 as compared to the inception period endedMarch 31, 2019 are primarily attributable to having a longer period in the current period whereas the inception period was of limited duration.
Transaction costs decreased for the nine months ended
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. The increase in depreciation and amortization for the three months endedMarch 31, 2020 as compared to the corresponding period in the prior year was primarily driven by increases in leasehold improvements and sleep study equipment in existing locations as well as the acquisition of Midwest. In addition to the factors discussed above, the increase in depreciation and amortization for the nine months endedMarch 31, 2020 as compared to the inception period endedMarch 31, 2019 are primarily attributable to having a longer period in the current period whereas the inception period was of limited duration. 45
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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 and nine months ended
For the three months ended March 31 ,
For the nine months ended
Percent
(in thousands) 2020 Change 2019 2020 Percent Change 2019
Revenue:
Total revenue $ 829 (22 )% $ 1,060 $ 2,585 (11 )% $ 2,915
Operating costs and
expenses:
Stock-based compensation 373 (2063 )% (19 ) 100 (117 )% (601 )
Consulting agreement - (100 )% (296 ) (285 ) (51 )% (580 )
Other general and
administrative (522 ) (23 )% (681 ) (1,319 ) (34 )% (2,005 )
Depreciation and
amortization (150 ) (17 )% (180 ) (508 ) 12 % (453 )
Total operating expenses (299 ) (1,176 ) (2,012 ) (3,639 )
Other income (expense):
Interest expense (39 ) (17 )% (47 ) (122 ) (10 )% (135 )
Other income (expense) - - % - - - % -
Total other expense, net (39 ) (47 ) (122 ) (135 )
Operating income (loss):
Total pre-tax income
(loss) from continuing
operations $ 491 $ (163 ) $ 451 $ (859 ) Investment Management Revenue
Investment management revenues include management fees and administrative fees. For the three months endedMarch 31, 2020 and 2019, management fees were$0.7 million and$0.7 million , respectively, and administrative fees were$0.1 million and$0.4 million , respectively. For the nine months endedMarch 31, 2020 and 2019, management fees were$2.2 million and$2.2 million , respectively, and administrative fees were$0.4 million and$0.7 million , respectively. The decrease in administration fee revenue for the three and nine months endedMarch 31, 2020 as compared to the administration fee revenue for the corresponding periods in the prior year is primarily due to lower allocations of overhead costs as a result of internal restructuring inJanuary 2019 . Though management fee revenue remained consistent for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 , we expect that such fees may be impacted by the COVID-19 pandemic resulting in decreased revenues going forward. Assets under management was approximately$202.8 million as ofMarch 31, 2020 , down from approximately$228.8 million as ofDecember 31, 2019 . The decrease in net assets was largely due to the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty around its long-term impact, as well as the re-pricing of credit risk in the broadly syndicated credit market. Portfolio companies of GECC have and may continue to experience disruptions in their business operations and supply-chains. As a result, these companies may experience financial distress and possibly default on financial obligations or significantly curtail business operations which may further impair their business on a permanent basis. As the duration of the COVID-19 pandemic and resulting economic effects is uncertain, we cannot fully predict the impact to our asset-based fee revenue in future periods. 46
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Investment Management Costs and Expenses
Stock-based compensation decreased by approximately$0.4 million for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 in connection with updated estimates related to performance-based awards, which were awarded in connection with internal restructuring inSeptember 2017 . The decrease in stock-based compensation for the nine months endedMarch 31, 2020 as compared to the nine months endedMarch 31, 2019 also reflects the impact of updated estimates related to these performance-based awards.
Costs associated with the consulting agreement decreased for the three and nine
months ended
The decrease in general and administrative costs for the nine months endedMarch 31, 2020 as compared to the nine months endedMarch 31, 2019 is primarily attributable to the increased allocation of overhead costs, including payroll-related costs, to the general corporate segment in connection with the acquisition of the durable medical equipment businesses inSeptember 2018 , thus reducing the allocation to the investment management segment. In addition, the three months endedMarch 31, 2019 includes certain onetime expenses related to internal restructuring that did not recur during the three months endedMarch 31, 2020 . Real Estate Business
The key metrics of our real estate business include rental revenues, depreciation on rental properties and interest expense on the related debt.
The following table provides the results of our real estate business for the
three and nine months ended
For the three months ended March 31, For the nine months ended March 31,
(in thousands) 2020 Percent Change 2019 2020 Percent Change 2019
Revenue:
Total revenue $ 1,276 0 % $ 1,272 $ 3,820 (9 )% $ 4,188
Operating costs and
expenses:
General and
administrative (125 ) (5 )% (131 ) (375 ) (51 )% (768 )
Depreciation and
amortization (430 ) (1 )% (436 ) (1,291 ) (1 )% (1,298 )
Total operating expenses (555 ) (567 ) (1,666 ) (2,066 )
Other income (expense):
Interest expense (654 ) (2 )% (667 ) (1,967 ) (1 )% (1,995 )
Other income (expense) - - % - - - % -
Total other expense, net (654 ) (667 ) (1,967 ) (1,995 )
Operating income (loss):
Total pre-tax income
(loss) from continuing
operations $ 67 $ 38 $ 187 $ 127
Real Estate Revenue
Real estate rental revenue for the three and nine months ended March 31, 2020
decreased as compared to the three and nine months ended March 31, 2019 as a
result of the adoption of updated lease accounting guidance, which excludes from
revenue and the corresponding real estate expenses any lessor costs paid
directly to third parties by the lessee.
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Real Estate Costs and Expenses
General and administrative costs primarily consisted of management fees, insurance, real estate taxes and state sales tax expense. The decrease in general and administrative costs for the three and nine months endedMarch 31, 2020 as compared to the three and nine months endedMarch 31, 2019 is primarily due to the adoption of updated lease accounting guidance, which excludes from revenue and the corresponding real estate expenses any lessor costs paid directly to third parties by the lessee.
General Corporate
The following table provides the results of our general corporate activities for
the three and nine months ended
For the three months ended March 31, For the nine months ended March 31,
(in thousands) 2020 Percent Change 2019 2020 Percent Change 2019
Revenue:
Total revenue $ 34 780 %$ (5 ) $ 114 75 %$ 65 Operating costs and expenses: Stock-based compensation (106 ) 28 % (83 ) (334 ) (3 )% (343 ) Transaction costs (286 ) 281 % (75 ) (863 ) (44 )% (1,534 ) Other general and administrative (1,409 ) (23 )% (1,824 ) (3,738 ) (25 )% (4,967 ) Depreciation and amortization (1 ) - % - (2 ) - % - Total operating expenses (1,802 ) (1,982 ) (4,937 ) (6,844 ) Other income (expense): Interest expense (155 ) - % - (155 ) - % - Other income (expense) (9,303 ) 640 % 1,722 (9,995 ) (2087 )% 503 Total other income (expense), net (9,458 ) 1,722 (10,150 ) 503 Operating income (loss): Total pre-tax income (loss) from continuing operations$ (11,226 ) $ (265 ) $ (14,973 ) $ (6,276 )
General Corporate Revenue
For the three and nine months endedMarch 31, 2020 and 2019, all revenue was derived from fees earned by DME Manager, which provides consulting services toGreat Elm DME, Inc. (DME Inc. )Both DME Manager and DME Inc. were formed in connection with the acquisition of the durable medical equipment businesses inSeptember 2018 and there was no corresponding activity prior to this acquisition. Revenues for the three and nine months endedMarch 31, 2020 increased as compared to the corresponding periods in the prior year due to stronger adjusted EBITDA results, the metric on which the fee is based, for the durable medical equipment business in the same periods.
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. The decrease in general and administrative costs for the nine months endedMarch 31, 2020 as compared to the nine months endedMarch 31, 2019 is primarily due to the$1.1 million decrease in the fair value of the contingent consideration during the nine months endedMarch 31, 2020 . In addition, general and administrative costs for the three and nine months endedMarch 31, 2019 , include one-time costs related to internal restructuring which occurred duringJanuary 2019 . 48
-------------------------------------------------------------------------------- Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities. The decrease in transaction costs for the nine months endedMarch 31, 2020 as compared to the nine months endedMarch 31, 2019 is attributable to the one-time costs incurred in connection with the acquisition of the durable medical equipment businesses inSeptember 2018 . The increase in transaction costs for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 is primarily related to our ongoing diligence of potential business opportunities. Interest expense for the three and nine months endedMarch 31, 2020 consists of interest on the Convertible Notes which were issued inFebruary 2020 . There is no corresponding debt or related interest expense for the three and nine months endedMarch 31, 2019 . Other Income (Expense) Other income (expense) primarily consists of dividends and unrealized gains or losses on the Company's investment in GECC and interest income earned on cash balances. The decreases in other income (expense) is primarily driven by fluctuations in the fair value of the investment in GECC, which resulted in unrealized losses of$9.8 million and$11.6 million for the three and nine months endedMarch 31, 2020 , respectively, as compared to unrealized gain of$0.8 million and unrealized loss of$1.9 million for the three and nine months endedMarch 31, 2019 , respectively.
Income Taxes
As ofJune 30, 2019 , the Company had NOL carryforwards for federal and state income tax purposes of approximately$1.6 billion and$199 million , respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2020 through 2037. The federal NOL carryforwards generated in fiscal year 2018 or later can be carried forward indefinitely. The state NOL carryforwards will expire from 2029 through 2037. The Company assesses NOL carryforwards based on taxable income on an annual basis. The Company's tax provision benefit for the nine months endedMarch 31, 2020 is immaterial and primarily relates to provision to return adjustments recorded during the current quarter.
Liquidity and Capital Resources
Cash Flows
Operating cash flows provided by continuing operations for the nine months endedMarch 31, 2020 were$4.6 million . The net cash inflow in our continuing operations was primarily the result of our net loss of$17.2 million offset by non-cash charges of$21.7 million . Additional net cash inflows from operations are attributable to an increase of$3.5 million in accounts payable, accrued liabilities and other liabilities partially offset by outflows due to decreases of$1.1 million and$0.8 million related to operating leases and related party payables, respectively. The fluctuations in these accounts are due to the timing of cash payments and cash receipts in the normal course of business.
Operating cash flows provided by continuing operations for the nine months ended
which includes a gain of
was primarily the result of our net loss of
outflows from operations are attributable to increases in accounts receivable and related party receivable which are
partially offset by increases in accounts payable, accrued liabilities and other liabilities. The fluctuations in these
accounts are due to the timing of cash payments and cash receipts in the normal course of business.
Investing cash flows used in continuing operations for the nine months endedMarch 31, 2020 were$4.5 million . The net cash outflow primarily consisted of$3.5 million in purchases of equipment for rental partially offset by proceeds from sale of equipment held for rental and disposal of property and equipment.
Investing cash flows used in continuing operations for the nine months ended
net cash outflow primarily consisted of
businesses in
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Financing cash flows used in continuing operations for the nine months ended
March 31, 2020 were $26.7 million which primarily consisted of issuance of
Convertible Notes during February 2020 , offset by principal payments on long
term debt, related party notes payable and our revolving line of credit.
Financing cash flows provided by continuing operations for the nine months ended
March 31, 2019 were $20.0 million . Approximately $16.1 million and $5.5 million
was provided by net proceeds on the note payable from a seller and a revolving
line of credit, respectively, established with the acquisition of the durable
medical equipment businesses. Subsequent to the acquisition, an additional $0.7
million in cash proceeds was drawn from the revolving line of credit. During the
nine months ended March 31, 2019 principal payments of $2.3 million were made on
long-term debt and related party notes payable. An additional $1.4 million was
provided by the exercise of warrants by MAST Capital in July 2018 .
On March 27, 2020 , the President of the United States passed into law the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Section 1102 of
the CARES Act, the Paycheck Protection Program Loan (PPP Loan) provided
additional funding for small businesses, as defined by the Small Business Act,
to keep workers employed during through the COVID-19 crisis. In April 2020 , our
80.1% owned subsidiary Great Elm DME, Inc. applied for and received $3.6 million
in PPP Loans. These loans accrue interest at 1% per annum, are due April 17,
2022 and uses of proceeds can only be used for specified covered purposes
including payroll, rent and utilities in accordance with the CARES Act. To the
extent proceeds are used for these covered purposes during the 8-week period
following funding, related principal balances are forgiven. The Company intends
to use the majority of these proceeds for covered purposes during this 8-week
period.
Additionally, under the CARES Act, the U.S. Department of Health and Human
Services provided targeted stimulus funding to the healthcare industry. In April
2020 , as part of this stimulus, subsidiaries of Great Elm DME Inc. received $1.4
million in additional provider relief funds (HHS Funds) to continue providing
health care treatment to patients during the COVID-19 pandemic. The HHS Funds
are subject to certain covenants and restrictions and are subject to recoupment
if not used for designated purposes. However, no assurance is provided that the
Company will obtain forgiveness of the HHS Funds in whole or in part.
We continue to monitor developments on these programs in order to conclude whether such amounts received represent debt or in-substance government grants.
Financial Condition
As ofMarch 31, 2020 , we had an unrestricted cash balance of$38.7 million . We also beneficially own 1,966,667 shares of GECC common stock with an estimated fair value of$5.5 million as ofMarch 31, 2020 . We intend to make acquisitions or investments that we believe will result in the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan. Borrowings As ofMarch 31, 2020 , the Company has$30.0 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
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The Convertible Notes are due on
As ofMarch 31, 2020 , the Company has a note due to a non-controlling interest holder ofDME Inc. ,Corbel Capital Partners SBIC, L.P. (Corbel), totaling$25.5 million that accrues interest at a rate of three-month LIBOR plus 10.0% (atMarch 31, 2020 , the effective interest rate was 11.9%) through maturity onAugust 31, 2023 (the Corbel Facility). The Corbel Facility requires quarterly interest payments along with principal payments of$0.4 million plus an additional amount based on excess cash flows, if any, generated by the durable medical equipment business operations. The Corbel Facility is secured by all of the assets of the durable medical equipment business. The Company has the option to prepay the borrowings outstanding under the Corbel Facility in whole or in part subject to certain prepayment penalties ranging from 1.0% - 5.0% of the early payment of the principal, based on the time that the Corbel Facility has been outstanding through the first five years of the loan.DME Inc. is required to pay to Corbel, as agent of the Corbel Facility, a quarterly monitoring fee of$25,000 per quarter while the borrowings remain outstanding. In addition, under certain conditions, if the borrowing is repaid with proceeds of debt in full or in part at any time within the first three years from the date of issuance, the borrower shall pay an additional fee to the agent, ranging from 2.10% to 3.50% depending on the date of repayment based on the period outstanding, of the aggregate repaid principal amount. As ofMarch 31, 2020 , the Company has a credit facility withPacific Mercantile Bank totaling$7.9 million that accrues interest at the prime rate plus 0.4% (atMarch 31, 2020 , the effective rate was 5.2%) through maturity onAugust 30, 2020 (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 Corbel Facility and DME Revolver each include covenants that restrictDME Inc. 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 ofDME Inc. DME Inc. must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on theDME Inc. EBITDA levels. As ofMarch 31, 2020 , the Company has a related partyGP Corp. Note due toMAST Capital totaling$3.1 million that accrues interest at a variable rate of three-month LIBOR plus 3.0%, as adjusted for each 90-day period (atMarch 31, 2020 , the effective rate was 4.9%) through maturity onNovember 3, 2026 .The GP Corp. Note requires minimum annual principal payments of$0.08 million and quarterly interest-only payments.The GP Corp. Note is secured by the profit sharing agreement between one of our wholly-owned subsidiaries,Great Elm Capital Management, Inc. (GECM) andGECC GP Corp. (the Profit Sharing Agreement) that transfers profits generated by our management of GECC, with no recourse to any of our other assets, entities or operations.The GP Corp. Note is non-recourse to any of the Company's operations or net assets not related to GECM's management services to GECC.The GP Corp. Note may be prepaid at par value at any time with prior written notice to the holders of theGP Corp. Note. Additionally,GECC GP Corp. is required to prepay theGP Corp. Note upon certain material liquidation transactions including any termination of the Profit Sharing Agreement. As ofMarch 31, 2020 , the Company has a senior note due toWells Fargo Bank Northwest , National as trustee totaling$50.6 million that accrues interest at a rate of 3.49% through maturity onMarch 15, 2030 (the Senior Note). The Senior Note requires monthly principal and interest payments through the maturity date. The Senior Note is secured by a first lien mortgage on the Property and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations. 51
-------------------------------------------------------------------------------- The principal and interest due on the Senior Note may be prepaid at the option of the borrower, based on an amount determined by discounting the remaining principal and interest payments at a rate equal to an applicable premium in excess of a rate corresponding to the specifiedU.S. Treasury security over the remaining average life of the Senior Note. As ofMarch 31, 2020 , the Company has a subordinated note due toWells Fargo Bank Northwest , National as trustee totaling$3.7 million that accrues interest at a rate of 15.0% through maturity onMarch 15, 2030 (the Subordinated Note). The Subordinated Note is a capital appreciation note, whereby the monthly interest is capitalized to the principal balance and due at maturity. The Subordinated Note is secured by a second lien mortgage on the Property, and an Assignment of Leases and Rents, with no recourse to any of our assets, entities or operations.
The principal and interest due on the Subordinated Note may be prepaid at the
option of the borrower, based on an amount determined by discounting the
remaining principal and interest payments at a rate equal to an applicable
premium in excess of a rate corresponding to the specified
The note agreements for both the Senior Note and the Subordinated Note include negative covenants that restrict the Company's majority-owned subsidiary,CRIC IT Fort Myers LLC's (the Property Owner), business operations to ownership and lease of the Property, limit additional indebtedness, require maintenance of insurance and other customary requirements related to the Property. Events of default include non-payment of amounts when due, inability to pay indebtedness or material change in the business operations or financial condition of the Property Owner or the lease tenant that in the lender's reasonable determination would reasonably be expected to materially impair the value of the Property, prevent timely repayment of the notes or performance of any material obligations under the notes and related agreements. The payments under the notes are also guaranteed on a full and several basis by the non-controlling interest holder of the Property Owner. Both the Senior Note and Subordinated Note are non-recourse to the Company, but are secured by the Property, the rights associated with the leases and the stock owned by the Company in the Property Owner.
Off-Balance Sheet Arrangements
As of
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 endedJune 30, 2019 , other than those noted in Item 1A Risk Factors. of this Quarterly Report on Form 10-Q.
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