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 three business operating segments: durable medical equipment, investment management and real estate, with general corporate representing unallocated costs and activity to arrive at consolidated operations.
In
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 , aSpecial 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 atMarch 31, 2021 was approximately$245.7 million .
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
Holding Company Reorganization
OnDecember 29, 2020 ,Great Elm Group, Inc. (the Company) completed a reorganization of the Company's corporate structure (the Holding Company Reorganization), whereGreat Elm Capital Group, Inc. (GEC) changed its name toForest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company,Great Elm Group, Inc. (the Company). Outstanding shares of Forest under the ticker symbol "GEC" were automatically converted into shares of common stock ofGreat 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 forU.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), aDelaware 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
$1,000.00 per share; 42
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•
9.0% Series A-1 preferred stock (the Series A-1 Preferred Stock) with a
maturity date of
to
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
business, such holders of Series A-1 Preferred Stock are only entitled to
their liquidation preference;
•
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
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;
•
reimbursed GEG
• 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
million. The Company's wholly-owned subsidiary, Great Elm DME Manager,
LLC, concurrently entered into an agreement with Forest to provide
advisory services in exchange for annual consulting fees of
(each collectively noted above, the JPM Transactions).
Using proceeds from the JPM Transactions,
COVID-19 During the three and nine months endedMarch 31, 2021 , the Company continued to experience suppressed revenues relative to its pre-pandemic expectations due to the continuing impact of the COVID-19 pandemic. In particular, the investment management business continues to experience reduced assets under management in our managed portfolios as compared to pre-pandemic levels. COVID-19 may continue to impact such managed portfolios as well as the value of the shares of GECC held by the Company in the future. In addition, the durable medical equipment business continues to experience a suppressed referral pipeline for sleep studies and durable medical equipment set-ups. 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 continue to experience decreased durable medical equipment rental revenues in the near future due to the reduction in new patient set-ups during the pandemic. 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 corporate headquarters as well as certain employees ofDME Inc. moved to a remote-working model. In addition, the officers of the Company have maintained regular communications with key service providers, including legal and accounting professionals, other consultants and vendors, noting that those firms have similarly moved to remote-working models to the extent possible. Such employees and key service providers have been able to effectively transition to working remotely while maintaining a consistent level of capabilities and service, however, we will continue to monitor and make adjustments as necessary. 43 -------------------------------------------------------------------------------- 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.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 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. 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, 2021 , we did not make material changes in our critical accounting policies or underlying assumptions as disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2020 as it relates to recurring transactions.
Results of Operations
The following discussion reflects the historical performance of our three business operating segments and general corporate. 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 months ended March 31, For the nine months ended March 31,
2021 Percent Change 2020 2021 Percent Change 2020
Revenue:
Total revenue $ 15,121 (7 )% $ 16,236 $ 48,355 0 % $ 48,158
Operating costs and
expenses:
Cost of goods sold (3,806 ) (4 )% (3,966 ) (12,716 ) 14 % (11,118 )
Cost of rentals (1,657 ) (20 )% (2,072 ) (5,193 ) (20 )% (6,522 )
Other selling, general
and administrative (8,989 ) (11 )% (10,154 ) (29,369 ) (0 )% (29,421 )
Depreciation and
amortization (1,048 ) (0 )% (1,053 ) (3,090 ) (5 )% (3,250 )
Total operating expenses (15,500 ) (17,245 ) (50,368 ) (50,311 )
Operating income (loss) (379 ) (1,009 ) (2,013 ) (2,153 )
Other income (expense):
Interest expense (2,179 ) 24 % (1,754 ) (6,047 ) 19 % (5,083 )
Other income (expense) (403 ) (96 )% (9,303 ) 339 (103 )% (9,992 )
Total other expense, net (2,582 ) (11,057 ) (5,708 ) (15,075 )
Total pre-tax income
(loss) $ (2,961 ) $ (12,066 ) $ (7,721 ) $ (17,228 )
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Revenue
Revenues for the three months endedMarch 31, 2021 decreased$1.1 million as compared to the corresponding period in the prior year. Durable medical equipment revenues decreased$1.0 million due to the continued suppressed referral pipeline for new equipment set-ups and increased revenue reserve constraints, partially offset by organic growth in resupply sales and one month of contributions from thePM Sleep Lab, LLC acquisition, Investment management revenues decreased$0.1 million related to lower management fees earned on managed portfolios during the quarter. Revenues for the nine months endedMarch 31, 2021 increased$0.2 million as compared to the corresponding period in the prior year, consisting of an increase of$0.5 million in durable medical equipment and partially offset by$0.3 million decrease in investment management fees. The increase in durable medical equipment revenue is primarily attributable to organic growth in resupply sales partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups and increased revenue reserve constraints, as well as decrease in management fees earned from our investment management business. Investment management revenues decreased$0.3 million related to lower management fees earned on managed portfolios during the quarter.
Operating costs and expenses
Operating costs for the three months endedMarch 31, 2021 decreased$1.8 million as compared to the corresponding period in the prior year. The decrease is primarily related to$2.3 million in Employee Retention Credits claimed during the quarter under the enhanced Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition, costs of rentals at our durable medical equipment business decreased$0.4 million as demand for new equipment set-ups remained suppressed during the pandemic. These decreases were partially offset by a$0.5 million benefit in the prior period in connection with updated estimates related to performance-based awards, which were awarded in connection with internal restructuring inSeptember 2017 . Such benefit did not recur in the current period. The remaining offsetting increase of$0.4 million is primarily related to increased payroll related and consulting costs. Operating costs for the nine months endedMarch 31, 2021 were relatively flat. This comparison includes the offsetting increases of durable medical equipment costs of goods sold of$1.6 million due to related sales growth, a non-recurring benefit in the prior year of$0.7 million in connection with updated estimates related to performance-based awards and increased payroll related and consulting costs, as well as decreases of$2.3 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act, a reduction in durable medical equipment costs of rentals of$1.2 million due to softened demand during the pandemic and a reduction in amortization expense of intangible assets of$0.2 million .
Other income (expense)
Interest expense increased for the three and nine months endedMarch 31, 2021 , as compared to the three and nine months endedMarch 31, 2020 , primarily due to interest expense associated with the Convertible Notes the Company issued at par with an aggregate principal balance of$32.3 million dueFebruary 26, 2030 (the Convertible Notes). Other income and expense for the three and nine months endedMarch 31, 2021 and 2020 primarily consisted of dividend income and net unrealized gains and losses on the Company's investment in GECC which is discussed in more detail under "-General Corporate" below.
In addition, the Company recognized approximately
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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, For the nine months ended March 31,
(in thousands) 2021 Percent Change 2020 2021 Percent Change 2020
Revenue:
Total revenue $ 13,117 (7 )% $ 14,131 $ 42,270 1 % $ 41,753
Operating costs and
expenses:
Cost of goods sold (3,806 ) (4 )% (3,966 ) (12,716 ) 14 % (11,118 )
Cost of rentals (1,657 ) (20 )% (2,072 ) (5,193 ) (20 )% (6,522 )
Transaction costs (107 ) -% - (194 ) -% -
Other selling, general and
administrative (6,023 ) (26 )% (8,113 ) (21,822 ) (4 )% (22,721 )
Depreciation and
amortization (508 ) 8 % (472 ) (1,433 ) (1 )% (1,449 )
Total operating expenses (12,101 ) (14,623 ) (41,358 ) (41,810 )
Other income (expense):
Interest expense (1,280 ) 41 % (906 ) (2,676 ) (6 )% (2,839 )
Other income (expense) (4,795 ) -% - (6,631 ) (221133 )% 3
Total other expense, net (6,075 ) (906 ) (9,307 ) (2,836 )
Operating income (loss):
Total pre-tax income (loss) $ (5,059 ) $ (1,398 ) $ (8,395 ) $ (2,893 ) Durable Medical Equipment Revenue
For the three months endedMarch 31, 2021 , revenues from the sale of medical equipment and sleep study services were$7.3 million and$1.3 million , respectively, while for the three months endedMarch 31, 2020 , such revenues were$7.5 million and$1.4 million , respectively. While gross medical equipment sales increased$0.3 million versus the corresponding period in the prior year, primarily attributable to organic growth of CPAP resupply sales, we also incurred increased revenue reserve constraints which offset this increase. For the nine months endedMarch 31, 2021 , revenues from the sale of medical equipment and sleep study services were$23.7 million and$3.6 million respectively, while for the nine months endedMarch 31, 2020 such revenues were$21.5 million and$4.2 million , respectively. The increases in medical equipment sales versus the corresponding period in the prior year, are primarily attributable to organic growth of CPAP resupply sales partially offset by increases in revenue reserve constraints, while the decrease in sleep study services is primarily attributable to softened demand for sleep studies during the ongoing COVID-19 pandemic. For the three and nine months endedMarch 31, 2021 , rental revenue was$4.5 million and$14.9 million , respectively, as compared to$5.2 million and$16.0 million , respectively, for the three and nine months endedMarch 31, 2020 . This decrease is due primarily to reduced referral pipelines for new equipment set-ups during the ongoing COVID-19 pandemic, which are customarily driven by in-house or external sleep studies. Revenue reserve constraints increased$0.5 million and$1.5 million , respectively during the three and nine months endedMarch 31 , 20201 as compared to the corresponding periods in the prior year. This decrease in revenues is attributable to several factors, including collections experience during the pandemic and the resulting composition of receivables at period end. 46
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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 decrease in operating costs for the three months endedMarch 31, 2021 as compared to the corresponding period in the prior year is primarily attributable to$2.2 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act, and decreases in costs of goods sold and cost of rentals corresponding with decreases in related revenues. The decrease in operating costs for the nine months endedMarch 31, 2021 as compared to the corresponding period in the prior year is also primarily attributable to$2.2 million in Employee Retention Credits claimed during the quarter under the enhanced CARES Act. In addition, we incurred higher costs of goods sold and lower cost of rentals, which corresponded to related changes in revenue. Our margins were also impacted by the revenue mix within the durable medical equipment business. We incurred lower margins on sales and services as high margin sleep lab testing decreased as a percentage of revenue and was replaced with lower margin equipment and supplies sales. The Company realized higher margins on rentals due to lower capital expenditures for new set-ups. In addition to these factors, for the nine months endedMarch 31, 2021 and 2020, payroll related costs were$16.5 million and$15.2 million , respectively excluding the impact on Employee Retention Credits. The increases in payroll related costs were primarily related to an accrued management bonus plan in the current year that was not present in the prior comparable period, a shared services agreement betweenGEG and DME Inc. and the conversion of consultants to full-time employees (which had a corresponding decrease in consulting fees of$0.4 million ). The durable medical equipment business has also 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. For the three and nine months endedMarch 31, 2021 , freight and postage expenses were$0.5 million and$1.3 million , respectively, as compared to$0.3 million and$0.9 million , respectively, for the three and nine months endedMarch 31, 2020 . The increase in freight and postage costs was primarily attributable to the additional costs of remote patient set-ups which were performed in person prior to the COVID-19 pandemic. 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 endedMarch 31, 2021 decreased as compared to comparable periods in the prior year due to decreased capital expenditures during the COVID-19 pandemic.
Durable Medical Equipment Other Expenses
The increase in interest expense for the three months endedMarch 31, 2021 as compared to the corresponding period in the prior year is attributable primarily to higher outstanding principal balances of theHC LLC preferred stock of$44.1 million as compared to$33.4 million outstanding under the Corbel Facility and DME Revolver (as defined below) as ofMarch 31, 2020 . The decrease in interest expense for the nine months endedMarch 31, 2021 as compared to the corresponding period in the prior year is primarily attributable to a smaller outstanding principal balance of the Corbel Facility and DME Revolver prior to being paid in full onDecember 29, 2020 . Prior to the repayment, the outstanding principal was$25.3 million which compared to$33.4 million as ofMarch 31, 2020 . 47
-------------------------------------------------------------------------------- During the three and nine months endedMarch 31, 2021 , the Company recognized a$4.8 million charge within the durable medical equipment business related to the recurring fair value adjustment of an embedded derivative in theHC LLC Series A-2 preferred stock issued to Forest. This has an off-setting impact in our General Corporate activity and eliminates in consolidation. During the three and nine months endedMarch 31, 2021 , the Company recognized a$1.9 million loss on the extinguishment of the Corbel Term Loan, which was paid in full inDecember 2020 .
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) 2021 Percent Change 2020 2021 Percent Change 2020
Revenue:
Total revenue $ 739 (11 )% $ 829 $ 2,272 (12 )% $ 2,585
Operating costs and
expenses:
Stock-based compensation (181 ) (149 )% 373 (572 ) (672 )% 100
Consulting agreement - -% - - (100 )% (211 )
Other general and
administrative (723 ) 39 % (522 ) (1,974 ) 42 % (1,393 )
Depreciation and
amortization (109 ) (27 )% (150 ) (364 ) (28 )% (508 )
Total operating expenses (1,013 ) (299 ) (2,910 ) (2,012 )
Other income (expense):
Interest expense (25 ) (36 )% (39 ) (76 ) (38 )% (122 )
Other income (expense) - -% - - -% -
Total other expense, net (25 ) (39 ) (76 ) (122 )
Operating income (loss):
Total pre-tax income
(loss) $ (299 ) $ 491 $ (714 ) $ 451 Investment Management Revenue
Investment management revenues include management fees and administrative
fees. For three and nine months ended
The decrease in management fees for the three and nine months endedMarch 31, 2021 as compared to the three and nine months endedMarch 31, 2020 is primarily attributable to decreases in the average assets on which such fees are calculated as a result of the impact of COVID-19 on the portfolio managed. 48
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Investment Management Costs and Expenses
Great Elm Capital Management, Inc. had a consulting agreement with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees. The consulting agreement expired inNovember 2019 and as such, there were no corresponding fees incurred for the three and nine months endedMarch 31, 2021 . Stock-based compensation was impacted by a non-recurring benefit in connection with updated estimates related to performance-based awards of$0.5 million and$0.7 million for the three and nine months endedMarch 31, 2020 . 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 endedMarch 31, 2021 as compared to the three and nine months endedMarch 31, 2020 , is primarily attributable to an increase in allocated payroll costs and consulting fees. Interest expense for the three and nine months endedMarch 31, 2021 decreased as compared to the three and nine months endedMarch 31, 2020 due to the decrease in the London Interbank Offered Rate, on which the interest rate is based.
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 months ended March 31, For the nine months ended March 31,
(in thousands) 2021 Percent Change 2020 2021 Percent Change 2020
Revenue:
Total revenue $ 1,276 -% $ 1,276 $ 3,824 0 % $ 3,820
Operating costs and expenses:
General and administrative (128 ) 2 % (125 ) (380 ) 1 % (375 )
Depreciation and amortization (430 ) -% (430 ) (1,291 ) -% (1,291 )
Total operating expenses (558 ) (555 ) (1,671 ) (1,666 )
Other income (expense):
Interest expense (645 ) (1 )% (654 ) (1,942 ) (1 )% (1,967 )
Other income (expense) - -% - - -% -
Total other expense, net (645 ) (654 ) (1,942 ) (1,967 )
Operating income (loss):
Total pre-tax income (loss) $ 73 $ 67 $ 211 $ 187
Real Estate Revenue
Real estate rental revenue for the three and nine months ended March 31, 2021
was consistent with the three and nine months ended March 31, 2020 . Real estate
rental revenue consists of rents received from the Class A office buildings in
Fort Meyers, Florida .
Real Estate Costs and Expenses
The real estate business' costs primarily consist of management fees, insurance
and state sales tax, depreciation of real estate assets and the amortization of
the in-place lease intangible assets. Our costs and expenses have generally
remained consistent year over year.
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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) 2021 Percent Change 2020 2021 Percent Change 2020
Revenue:
Total revenue $ 162 376 % $ 34 $ 298 161 % $ 114
Operating costs and
expenses:
Stock-based compensation (435 ) 310 % (106 ) (758 ) 127 % (334 )
Transaction costs (155 ) (46 )% (286 ) (416 ) (52 )% (863 )
Other general and
administrative (1,410 ) 0 % (1,409 ) (3,562 ) (5 )% (3,738 )
Depreciation and
amortization (1 ) -% (1 ) (2 ) -% (2 )
Total operating expenses (2,001 ) (1,802 ) (4,738 ) (4,937 )
Other income (expense):
Interest expense (1,460 ) 842 % (155 ) (2,584 ) 1567 % (155 )
Other income (expense) 5,623 (160 )% (9,303 ) 8,201 (182 )% (9,995 )
Total other income
(expense), net 4,163 (9,458 ) 5,617 (10,150 )
Operating income (loss):
Total pre-tax income
(loss) $ 2,324 $ (11,226 ) $ 1,177 $ (14,973 )
General Corporate Revenue
For the three and nine months ended March 31, 2020 , all revenue was derived from
fees earned by Great Elm DME Manager, LLC, which provides consulting services to
DME Inc. In addition to this revenue, the three and nine months ended March 31,
2021 , revenue includes $0.1 million in fees earned by DME Manager relating to
consulting services provided to Forest Investments, Inc. (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. Transaction costs primarily consist of professional fees in connection with our acquisitions of assets and businesses, as well as diligence for potential future opportunities. Stock-based compensation increased$0.3 million and$0.4 million for the three and nine months endedMarch 31, 2021 , respectively as compared to the corresponding periods in the prior year. The increase was due primarily to the election of certain directors to receive their compensation in the form of shares instead of cash, which had a corresponding decrease in other general and administrative. The decrease in other general and administrative costs for the nine months endedMarch 31, 2021 as compared to the nine months endedMarch 31, 2020 is primarily attributable to the impact of director stock-based compensation discussed above as well as lower audit-related professional fees due to the change in auditors in the prior fiscal year, as well as the Company becoming a non-accelerated filer with reduced reporting requirements under the updated rules of theSEC . This decrease is partially offset by$0.1 million in fees charged to Forest by DME Manager relating to consulting services. 50
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Other Income (Expense)
Interest expense for the three and nine months endedMarch 31, 2021 consists primarily of interest on the Convertible Notes, as well as on Forest Preferred Stock, which was issued inDecember 2020 . The corresponding periods in the prior year only include one month of interest on the Convertible Notes and no interest on the Forest Preferred Stock, as it was not outstanding in the prior periods. Other income (expense) primarily consists of dividends and unrealized losses on the Company's investment in GECC as well as intercompany interest income onHC LLC Preferred Stock held by our Corporate subsidiary Forest. Dividend income increased for the three and nine months endedMarch 31, 2021 as compared to the corresponding periods in the prior year as the Company's investment in GECC increased through stock distributions received and participation in the GECC rights offering inOctober 2020 . In addition, the Company recognized net unrealized losses of$1.1 million and$0.5 million for the three and nine months endedMarch 31, 2021 , respectively, and net unrealized losses of$9.8 million and$11.6 million for the three and nine months endedMarch 31, 2020 , respectively. Our investment in GECC is marked-to-market by reference to the closing price on Nasdaq as of each period end. Intercompany interest income related toHC LLC Preferred Stock was$1.2 million for the three and nine months endedMarch 31, 2021 , with no corresponding amounts in the prior periods as this Preferred Stock was not outstanding during that time. In addition, during the three and nine months endedMarch 31, 2021 , General Corporate recognized$4.8 million benefit related to the recurring fair value adjustment of an embedded derivative in theHC LLC Series A-2 preferred stock issued to Forest. This has an off-setting impact in our durable medical equipment business and eliminates in consolidation.
Income Taxes
As ofJune 30, 2020 , the Company had NOL carryforwards for federal and state income tax purposes of approximately$1.5 billion and$203 million , respectively. The federal NOL carryforwards generated prior to fiscal year 2018 will expire from 2021 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 2038. The Company assesses NOL carryforwards based on taxable income on an annual basis.
Liquidity and Capital Resources
Cash Flows
Cash flows used in operating activities for the nine months endedMarch 31, 2021 were$21.2 million . The net cash outflow was primarily the result of our net loss of$7.7 million ,$25.4 million in net 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$7.8 million related to depreciation and amortization,$2.1 million related to amortization of debt issuance costs,$1.9 million related to loss on extinguishment of debt and$1.3 million in stock-based compensation. Cash flows provided by operating activities 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. Cash flows used in investing activities for the nine months endedMarch 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 inOctober 2020 and$4.6 million in purchases of equipment to be held for rental. 51
-------------------------------------------------------------------------------- Cash flows used in investing activities 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. Cash flows provided by financing activities for the nine months endedMarch 31, 2021 were$18.5 million which primarily consisted of$37.7 million in gross proceeds from the JPM Transactions,$12.1 million in margin borrowing due to broker from investment purchases in the consolidated funds, capital contributions from non-controlling interests in the consolidated funds of$3.3 million and$2.9 million in proceeds from new equipment financing debt. Such inflows were partially offset by principal payments of$34.1 million on our debt, including$31.0 million used to pay off the Corbel Facility,$1.6 million in payments of debt extinguishment costs and debt issuance costs of$1.3 million in connection with the JPM Transactions. Cash flows provided by financing activities for the nine months endedMarch 31, 2020 were$26.7 million which primarily consisted of issuance of Convertible Notes duringFebruary 2020 , offset by principal payments on long term debt, related party notes payable and our revolving line of credit.
Financial Condition
As ofMarch 31, 2021 , we had an unrestricted cash balance of$24.3 million . We also hold 5,539,724 shares of GECC common stock with an estimated fair value of$18.8 million as ofMarch 31, 2021 . We intend to make acquisitions or investments that we believe will result in the investment of all of our liquid financial resources, to issue equity securities and to incur indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan. Borrowings As ofMarch 31, 2021 , the Company had$33.5 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 onJune 30 andDecember 31 , in cash or in kind at the option of the Company. The Convertible Notes are due onFebruary 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 ofMarch 31, 2021 , JPM held$35.0 million face value in shares of Forest Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of$1,000 per share onDecember 29, 2027 , or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior toDecember 29, 2027 . The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than$300 million . The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The shares rank senior and have preference to the common shares of Forest. The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights. 52 -------------------------------------------------------------------------------- As ofMarch 31, 2021 , Corbel and VHG, both related parties, held a combined$2.0 million in face value of shares ofHC 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 orDecember 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 ofHC LLC . The shares are non-voting, do not participate in the earnings ofHC 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,DME Inc. must also comply with a leverage ratio and levered free cash flow ratio, which are based in part on theHC LLC EBITDA levels. The Company has a credit facility withPacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (atMarch 31, 2021 , the effective rate was 3.7%) through maturity onNovember 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 ofMarch 31, 2021 . The DME Revolver includes 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, 2021 , the Company had a senior note due toWells Fargo Bank Northwest , National as trustee totaling$48.3 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. 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, 2021 , the Company had a subordinated note due toWells Fargo Bank Northwest , National as trustee totaling$4.3 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
53
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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 ended
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