The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The following table reconciles the amounts shown for cash and cash equivalents and restricted cash in the condensed consolidated balance sheets to the amounts shown for cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019
1. Organization
Great Elm Capital Group, Inc. (the
Company
) is a holding company incorporated in Delaware. The Company currently has four operating segments: durable medical equipment, investment management, real estate and general corporate. The Company is pursuing business development opportunities in durable medical equipment, investment management, real estate and other industries.
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 (
Valley
) and Northwest Medical, Inc. (
Northwest
), 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 accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Wholly-owned subsidiaries include Great Elm Capital Management, Inc. (
GECM
), Great Elm Opportunities GP, Inc., Great Elm FM Acquisition, Inc., DME Holdings and Great Elm DME Manager, LLC. Majority-owned subsidiaries include GECC GP Corp., Great Elm FM Holdings, Inc., CRIC IT Fort Myers, LLC and DME Inc. and its seven wholly-owned subsidiaries.
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, 2018, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2018.
Use of Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (
US GAAP
) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. The most important of these estimates and assumptions relate to revenue recognition, recognition of rental income, estimates for contractual allowances, estimates for allowance for doubtful accounts, 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.
9
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 13 – Non-Controlling Interests and Preferred Stock of Subsidiary. Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations.
Segments
The Company has four operating segments: durable medical equipment, investment management, real estate and general corporate. The Company regularly reviews each segment for purposes of allocating resources and assessing performance.
Cash, Cash Equivalents, and Restricted Cash
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 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.
The Company’s restricted cash consists of real estate rental income received in advance and a portion of prior period rental income that is reserved for capital and certain operating expenses in connection with the Company’s real estate assets.
Accounts receivable
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. Substantially all of the accounts receivable balance relates to the durable medical equipment business. The Company does not require collateral in connection with its customer transactions. 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 contractual allowances where the gross charge is greater than the contractual rate with the Payors. Management’s evaluation of variable consideration takes into account such factors as past experience, contractual rates with Payors and information about specific receivables and Payors. In addition, co-payments, co-insurance and deductible amounts billed to patient customers are initially constrained until paid. 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 three and nine months ended March 31, 2019 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 providers for reasons not covered under the manufacturer’s standard warranty. Therefore, there is no provision for sales return reserves. The Company does not have significant bad debt experience with Payors, and therefore does not maintain an allowance for doubtful accounts.
10
As of March 31, 2019, the Company had unbilled receivables of approximately $0.7 million that relate to transac
tions where the Company has the ultimate right to invoice a Payor under the terms of the arrangement, but are not currently billable and are therefore contract assets. Such contract assets are included in accounts receivable in the consolidated balance sh
eets.
Investments and Restricted Investments
Investments and restricted investments consist of shares in Great Elm Capital Corp. (
GECC
), which is carried at fair value. The Company’s restricted investment represents a portion of its investment in GECC, which has been contributed as part of the capitalization of DME Holdings, as required under the terms of the DME Holdings preferred stock. Under the terms of the preferred stock issued by DME Holdings (See Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary), the Company is required to maintain capitalization of DME Holdings at a specified level with qualifying assets. Therefore these assets are restricted and not available for use to fund the Company’s operations. If at any month end the value of the qualifying assets falls below the required threshold, the Company shall, as promptly as practicable, contribute additional assets to meet the capitalization requirements. Similarly, if at any month end the value of the qualifying assets exceeds the required threshold, the Company may remove the excess assets. The Company has provided DME Holdings with shares of GECC in the amount of $4.4 million as of March 31, 2019, as capitalization for the preferred stock in DME Holdings.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under US GAAP. See Note 8 – Fair Value Measurements.
Property, Equipment, Real Estate Assets and Rental Equipment
The Company records property and equipment acquired at cost. The costs of property acquired from asset acquisitions or business combinations is recorded at fair value at the date of acquisition based on its estimated replacement costs.
The Company capitalizes the cost of the equipment predominantly leased out as part of the durable medical equipment business as such assets are acquired within equipment held for rental, net. These purchases are classified as cash outflows from investing activities when they are paid. The Company capitalizes the cost of equipment predominantly sold as part of the durable medical equipment business as such assets are acquired within inventories. These purchases are classified as cash outflows from operating activities when they are paid. A portion of equipment recorded within equipment held for rental, net, could ultimately be sold. A portion of equipment recorded within inventories could ultimately be leased. Management is not able to accurately track the ultimate use of equipment and has therefore adopted the above stated policy.
Management has estimated the useful lives of equipment leased to customers where title ultimately transfers to customers (e.g., capped rentals, typically 13 months with title transfer) based upon an analysis of ultimate disposition of rental equipment, some of which is returned to the Company and either re-leased or sold.
The Company recognizes depreciation in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives, which considers the term of lease for any leased assets. The Company capitalizes expenditures for improvements that significantly extend the useful life of an asset. The Company charges expenditures for maintenance and repairs to operations in the periods incurred. When assets are sold, the asset and accumulated depreciation are eliminated and a gain or loss is recognized in operating income.
11
Depreciation is recognized using the straight-line method over their estimated useful lives as follows:
Description
|
|
Life in Years
|
Real Estate Assets
|
|
|
Buildings
|
|
55
|
Site improvements
|
|
16
|
Tenant improvements
|
|
12
|
Property and Equipment
|
|
|
Leasehold improvements
|
|
lesser of 7 years or life of the lease
|
Vehicles
|
|
5
|
Sleep study equipment
|
|
5
|
Furniture and fixtures
|
|
1 to 5
|
Computer equipment and software
|
|
3
|
Rental Equipment
|
|
|
Medical equipment for lease
|
|
1 to 5
|
Inventories
Inventories, which principally consist of durable medical equipment and related supplies that are predominantly held for sale, are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventories for items that are potentially excess, obsolete, or slow-moving based on changes in customer demand, technology developments or other economic factors. The Company bases its provisions for excess, expired and obsolete inventory primarily on our estimates of forecasted net sales. A significant change in the timing or level of demand for our products as compared with forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. As the Company purchases all of its inventories, all inventories are categorized as finished goods. There were no significant write-offs during the nine months ended March 31, 2019.
Goodwill and Other Identifiable Intangible Assets
Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized. Instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter.
The Company amortizes its identifiable intangible assets over their estimated useful lives using applicable discounted cash flow attribution and straight-line methods. The Company amortizes its identifiable intangible assets over periods ranging from five to fifteen years.
Long-Lived Assets
Long-lived assets include real estate assets, property and equipment, intangible assets and the right of use assets. These assets are evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable based on undiscounted cash flows. If an impairment is indicated, the Company records the impaired asset at fair value, and records a charge to operations. No such impairment triggering events were identified in the current period.
Leases and Right of Use Assets
We determine if an arrangement is a lease at inception. As of March 31, 2019, all of our leases are operating leases. Operating leases are included in operating lease right of use assets (
ROU
), current portion of lease liabilities and lease liabilities net of current portion in the condensed consolidated balance sheets.
12
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments
arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on
the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU assets also includes any lease payments made and adjustments recorded in acquisition accountin
g. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are accounted for together as a single lease component.
At March 31, 2019, the majority of our lease liabilities and ROU assets were acquired with the durable medical equipment businesses as discussed in Note 4 – Acquisition and the amounts disclosed on the condensed consolidated balance sheet represent preliminary valuations.
Cost of Durable Medical Equipment Sold and Services
Cost of durable medical equipment sold and services includes costs included in inventory for medical equipment sold and direct costs associated with providing sleep study services, including staff to perform the studies and supplies used in the studies.
Cost of Durable Medical Equipment Rentals
Cost of rentals includes depreciation on medical equipment held for lease and related maintenance expenses.
Durable Medical Equipment Other Operating Expenses
The Company classifies direct expenses of its durable medical equipment segment, including payroll, facilities and equipment costs, professional fees and other administrative costs, in durable medical equipment other operating expenses in the accompanying condensed consolidated statements of operations.
Investment Management Expenses
The Company classifies direct expenses of its investment management segment including: payroll, stock-compensation, and related taxes and benefits; facilities costs; and professional fees; in investment management expenses in the accompanying condensed consolidated statements of operations. GECM has a three-year contractual consulting arrangement through November 2019 with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees.
Real Estate Expenses
The Company classifies direct expenses of its real estate segment, including: real estate taxes, insurance, property management fees and other operating expenses in real estate expenses in the accompanying condensed consolidated statements of operations. Under the terms of the lease, the Company may recover from the tenant certain expenses including: real estate taxes, insurance and other operating expenses; the recovery of these expenses is recognized in rental income in the accompanying consolidated statements of operations, in the same periods as the expense are incurred.
Depreciation and Amortization
The Company has separately presented depreciation and amortization expense, except for depreciation expense which is included in cost of durable medical equipment rentals as described above, which is based on its estimate of useful lives of the assets.
13
Business combinations
Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in selling, general and administrative expenses; previously held equity interests are valued at fair value upon the acquisition of a controlling interest; restructuring costs associated with a business combination are expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. Measurement period adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed. The fair value of contingent consideration is remeasured each period based on relevant information and changes to the fair value are included in the operating results for the period.
Net Income (Loss) per Share
Basic net income or loss per share is computed by dividing the net income or loss by the weighted-average number of common shares outstanding for the period. Diluted net income or loss per share is computed by dividing the diluted net income or loss by the weighted-average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, unvested restricted common shares and common stock warrants, as determined using the treasury stock method. For periods in which the Company has reported net losses from continuing operations, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
As of March 31, 2019, the Company had 3,459,602 potential shares of Company common stock issuable upon exercise of the stock options that are not included in the diluted net loss per share calculations for the nine months ended March 31, 2019 because to do so would be antidilutive. In calculating diluted income per share for the three months ended March 31, 2019, we adjusted the denominator by 12,365 incremental shares under the treasury stock method, however, we excluded the effects of 1,530,156 potential shares of the Company common stock issuable upon exercise of the stock options as inclusion of these potential shares would be antidilutive.
As of March 31, 2018, the company had 3,876,259 potential shares of Company common stock issuable upon exercise of the stock options that are not included in the diluted net loss per share calculations for the three and nine months ended March 31, 2018 because to do so would be antidilutive.
Restrictions on Subsidiary Dividends
In the GP Corp. Note Agreement, GECC GP Corp. agreed not to declare any dividends until the GP Corp. Note is satisfied. In the Senior Note and Subordinated Note, CRIC IT Fort Myers, LLC is restricted from paying any dividends until the Notes are satisfied. The ability of DME Inc. to pay dividends is subject to compliance with the restricted payment covenants under the Corbel Facility and DME Revolver.
Concentration of Risk
The Company’s net investment revenue and receivables for the periods presented were attributable to the management of one investment vehicle, GECC, which is also a related party. See Note 5 – Related Party Transactions.
The Company’s real estate rental revenue from continuing operations is derived from one tenant.
14
The Company’s durable medical equipment revenue and related accounts receivable are concentrated with third-party Payors. For the three and nine months ended March 31, 2019, one government program payor constituted approximately 25
% and 27%, respectively, of consolidated revenues. As of March 31, 2019, receivables from that government program payor constituted 23% of our ending accounts receivable. An additional government program payor constituted another 11% and 10% of consolida
ted revenues for the three and nine months ended March 31, 2019, respectively.
Recently Adopted Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (
FASB
) issued the New Revenue Standard, which replaced Accounting Standards Codification (
ASC
) Topic 605,
Revenue Recognition
(
Topic 605
), including industry-specific requirements, and provided companies with a single principles-based revenue recognition model for recognizing revenue from contracts with customers. The core principle of the New Revenue Standard is that a company should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
On July 1, 2018, the Company adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, (
Topic 606
) and related amendments, under the modified retrospective transition method. Accordingly, the periods prior to adoption are presented under our prior accounting policies and we applied the new guidance to all open contracts with customers as of the implementation date.
The new guidance outlines a single revenue recognition model for all contracts with customers and provides a framework for addressing revenue recognition issues on a comprehensive basis. The framework includes five steps:
|
1.
|
Identifying the contract(s) with a customer.
|
|
2.
|
Identifying the performance obligations in the contract.
|
|
3.
|
Determining the transaction price.
|
|
4.
|
Allocating the transaction price to the performance obligations in the contract.
|
|
5.
|
Recognizing revenue when (or as) the entity satisfies a performance obligation.
|
The adoption of Topic 606 impacted the Company’s revenue recognition policy for incentive fee revenue associated with our investment management agreements. The Company’s revenue recognition policy for rental revenue for its real estate segment did not change since the revenue recognition for such arrangements is outside the scope of Topic 606.
Under Topic 606, variable consideration such as incentive fees must be constrained (not recognized) if it is not probable that there would not be a significant reversal of recognized revenue. There was no impact on the Company’s revenue recognition policy for management and administrative revenues as these amounts are not subject to constraint. The Company fully constrained its performance-based incentive fee revenue in contrast to recognizing revenue based on a hypothetical liquidation of net assets on the reporting date and the distribution of the net proceeds in accordance with the respective investment management agreements under its prior policies. Under the modified retrospective method, the cumulative effect of adopting Topic 606 was recognized as an adjustment to eliminate incentive fees receivable and increase accumulated deficit of $2.9 million and after such adjustment there were no incentive fees receivable.
The following table reflects the impact of the cumulative effect of the accounting changes upon the adoption of Topic 606 on the condensed consolidated balance sheet as of the beginning of the period:
(in thousands)
|
|
As of June 30, 2018
|
|
|
Impact of accounting change
|
|
|
As of July 1, 2018
|
|
Incentive fees receivable - related party
|
|
$
|
2,919
|
|
|
$
|
(2,919
|
)
|
|
$
|
-
|
|
Accumulated deficit
|
|
|
(3,238,547
|
)
|
|
|
(2,919
|
)
|
|
|
(3,241,466
|
)
|
15
The following table shows the effect of the change in accounting on the condensed consolidated statement of operations:
|
|
For the three months ended March 31, 2019
|
|
|
For the nine months ended March 31, 2019
|
|
(in thousands)
|
|
Under Topic 605
|
|
|
Under Topic 606
|
|
|
Effect of Change
|
|
|
Under Topic 605
|
|
|
Under Topic 606
|
|
|
Effect of Change
|
|
Investment management revenues
|
|
$
|
2,721
|
|
|
$
|
1,060
|
|
|
$
|
1,661
|
|
|
$
|
5,526
|
|
|
$
|
2,915
|
|
|
$
|
2,611
|
|
Durable medical equipment sales and services revenue
|
|
|
7,383
|
|
|
|
7,383
|
|
|
|
-
|
|
|
|
19,243
|
|
|
|
19,243
|
|
|
|
-
|
|
Total revenues accounted for under Topic 606
|
|
$
|
10,104
|
|
|
$
|
8,443
|
|
|
$
|
1,661
|
|
|
$
|
24,769
|
|
|
$
|
22,158
|
|
|
$
|
2,611
|
|
Total revenues
|
|
|
15,745
|
|
|
|
14,084
|
|
|
|
1,661
|
|
|
|
38,709
|
|
|
|
36,098
|
|
|
|
2,611
|
|
Net income (loss) from continuing operations
|
|
|
1,983
|
|
|
|
322
|
|
|
|
1,661
|
|
|
|
(3,259
|
)
|
|
|
(5,870
|
)
|
|
|
2,611
|
|
Net income (loss)
|
|
|
5,862
|
|
|
|
4,201
|
|
|
|
1,661
|
|
|
|
527
|
|
|
|
(2,084
|
)
|
|
|
2,611
|
|
Net income (loss) attributable to Great Elm Capital Group
|
|
|
5,897
|
|
|
|
4,236
|
|
|
|
1,661
|
|
|
|
497
|
|
|
|
(2,114
|
)
|
|
|
2,611
|
|
Basic net income (loss) per share
|
|
$
|
0.23
|
|
|
$
|
0.17
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.10
|
|
Diluted net income (loss) per share
|
|
|
0.23
|
|
|
|
0.17
|
|
|
|
0.06
|
|
|
|
0.02
|
|
|
|
(0.08
|
)
|
|
|
0.10
|
|
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
, resulting in various disclosures related to fair value measurements being eliminated, modified or supplemented. ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019, with an option to early adopt any eliminated or modified disclosures, and to delay adoption of the additional disclosures, until the effective date. The Company early adopted the eliminated and modified disclosures of ASU 2018-13 during the three months ended September 30, 2018 and, as a result, updated its financial statement disclosures accordingly. A modified narrative description of measurement uncertainty for level 3 fair value measurements was applied prospectively, with all other amendments applied retrospectively.
Lessor Lease Accounting
In December 2018, the FASB issued ASU 2018-20,
Leases (Topic 842): Narrow-Scope Improvements for Lessors
(
ASU 2018-20
). The new guidance permits lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs, and instead, account for those costs as lessee costs. Additionally, the guidance updates revenue recognition related to variable payments by (1) requiring lessors to exclude from variable payments lessor costs paid directly to third parties by lessees; and (2) requiring lessors to allocate certain variable payments to lease and nonlease components when there are changes in facts and circumstances on which the variable payment is based. When an allocation of variable payments between lease and nonlease components is made, the variable payment allocated to the lease component will be recognized as revenue in accordance with Topic 842, whereas the variable payment allocated to the nonlease component will be recognized in accordance with other applicable topics, such as Topic 606. On January 1, 2019, the Company adopted ASU 2018-20 on a prospective basis and did not make the accounting policy election to account for certain taxes as lessee costs. Sales and use taxes incurred and reimbursed by lessees related to our Real Estate business are recorded gross within real estate rental income and real estate expenses. In addition, the adoption resulted in a reduction of real estate rental income and real estate expenses related to lessor costs paid directly to third parties by lessees of approximately $0.2 million during the quarter ended March 31, 2019.
16
Recently Issued Accounting Standards
Share-Based Compensation
In June 2018, the FASB issued amended guidance expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, ASU 2018-07
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
. The new standard will include share-based payment transactions for acquiring goods and services from nonemployees, whereby share-based payments to nonemployees will be measured and recorded at the fair value of the equity instruments that an entity is obligated to issue on the grant date. The standard should be applied for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period using a modified retrospective approach with a cumulative adjustment to opening retained earnings in the year of adoption for the remeasurement of liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established. Early application is permitted. We are currently evaluating the impact of this guidance on the Company’s 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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Product and Services Revenue
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees
|
|
$
|
691
|
|
|
$
|
693
|
|
|
$
|
2,214
|
|
|
$
|
1,850
|
|
Incentive Fees
|
|
|
-
|
|
|
|
(1,766
|
)
|
|
|
-
|
|
|
|
735
|
|
Administration Fees
|
|
|
369
|
|
|
|
282
|
|
|
|
701
|
|
|
|
916
|
|
|
|
|
1,060
|
|
|
|
(791
|
)
|
|
|
2,915
|
|
|
|
3,501
|
|
Durable Medical Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Sales
|
|
|
5,996
|
|
|
|
-
|
|
|
|
15,798
|
|
|
|
-
|
|
Service Revenues
|
|
|
1,387
|
|
|
|
-
|
|
|
|
3,445
|
|
|
|
-
|
|
|
|
|
7,383
|
|
|
|
-
|
|
|
|
19,243
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and services revenue
|
|
$
|
8,443
|
|
|
$
|
(791
|
)
|
|
$
|
22,158
|
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
|
1,272
|
|
|
|
343
|
|
|
|
4,188
|
|
|
|
343
|
|
Durable Medical Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Equipment Rental Income
|
|
|
4,369
|
|
|
|
-
|
|
|
|
9,752
|
|
|
|
-
|
|
Total rental revenue
|
|
|
5,641
|
|
|
|
343
|
|
|
|
13,940
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,084
|
|
|
$
|
(448
|
)
|
|
$
|
36,098
|
|
|
$
|
3,844
|
|
(1)
|
Revenue for sales of products or services recognized in the three and nine months ended March 31, 2019 and 2018 was accounted for under Topic 606 and Topic 605, respectively, as discussed in this note and Note 2 – Summary of Significant Accounting Policies.
|
Revenue Accounting Under Topic 605
For discussion of our revenue recognition policy as it relates to revenue transactions accounted for prior to July 1, 2018, which was accounted for under Topic 605, refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
17
Revenue Accounting Under Topic 606
In determining the appropriate amount of revenue to be recognized under 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, gross charges are retail charges and generally do not reflect what the Company is ultimately paid. 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 contractual allowances and discounts 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, which are included in the transaction price when considered probable of payment, which is generally when paid, and included in revenue if the product or service has already been provided to the customer.
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, 2019, 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. As such, the Company has no contract liabilities as of March 31, 2019 and December 31, 2018.
18
Included in sales and services revenue are unbilled amounts for which the revenue recognition criteria h
ad 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. Such amounts related to contracts with customers are not mater
ial as of March 31, 2019 and December 31, 2018.
We had no balances of contract assets or contract liabilities related to equipment sales and services as of June 30, 2018 as these contracts with customers were acquired in September 2018, with our acquisition of the durable medical equipment businesses.
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; as follows:
Management Fees
The Company earns management fees based on the investment management agreement GECM has with GECC. The performance obligation is satisfied over time as the services are rendered, since GECC simultaneously receives and consumes the benefits provided as GECM performs services. Under GECC’s investment management agreement with GECM, the base management fee from GECC is calculated at an annual rate of 1.50% of GECC’s average adjusted gross assets. The base management fee is calculated based on the average value of GECC’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters. Management fees are billed quarterly in arrears.
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%. Because of the uncertainty of when incentive fees will be collected due to market conditions and investment performance, incentive fees are fully constrained and not recorded until received and
the probability of significant reversal of the fees is eliminated
in accordance with the respective investment management agreements.
Administration 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.
19
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, which is generally when paid.
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, 2019, 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 $0.7 million as of March 31, 2019 and December 31, 2018.
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. The estimate of net unbilled rental revenue recognized is based on historical trends and estimates of future collectability. Such amounts related to equipment rentals are not material as of March 31, 2019 and December 31, 2018.
We had no balances related to deferred revenue or unbilled revenue related to equipment rentals as of June 30, 2018 as these balances were acquired in September 2018, with our acquisition of the durable medical equipment businesses.
Real Estate Revenue
Rental Revenue
Consistent with the leases of durable medical equipment, the Company recognizes rental revenue on a straight-line basis over the non-cancelable term of the lease. Under the terms of the lease, the Company may recover from the tenant certain expenses, including: real estate taxes, insurance and other operating expenses. The recovery of these expenses is recognized in rental income in the accompanying condensed consolidated statements of operations, in the same periods as the expenses are incurred. These expenses recognized in both revenue and expense may fluctuate from period to period based on actual expense amounts.
20
4. Acquisition
In September 2018, through its subsidiary, DME Holdings, the Company acquired an 80.1% interest in DME Inc., an entity formed to acquire and combine two previously unrelated durable medical equipment distribution companies, Valley and Northwest, which both specialize in the distribution of sleep and respiratory care equipment, including positive air pressure equipment and supplies, ventilators, and oxygen equipment. The medical distribution companies operate in Alaska, Arizona, Nebraska, Oregon and Washington. The Company expects to achieve significant synergies and costs reductions through the combination of these companies in this acquisition. Operating results of the acquired businesses have been included in the consolidated statements of operations since September 1, 2018 as the impact of including the period prior to September 7, 2018 was immaterial to the condensed consolidated financial statements.
On the date of Acquisition, the Company allocated the consideration given to the individual assets acquired and the liabilities assumed based on a preliminary estimate of their fair values. The assessment of fair value initially reported, as of and for the three months ended September 30, 2018, was preliminary as the Company had not finalized its fair value estimates.
During the nine months ended March 31, 2019, the Company obtained and considered additional information related to the assets acquired and liabilities assumed, and recorded measurement period adjustments to the allocation of the purchase price noted below.
The acquisition date fair value of the consideration transferred is summarized in the following table:
(in thousands)
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Cash
|
|
$
|
25,321
|
|
|
$
|
-
|
|
|
$
|
25,321
|
|
Net working capital adjustment
|
|
|
-
|
|
|
|
(254
|
)
|
|
|
(254
|
)
|
Increase in note payable to seller
(1)
|
|
|
16,500
|
|
|
|
-
|
|
|
|
16,500
|
|
Debt assumed
|
|
|
9,275
|
|
|
|
-
|
|
|
|
9,275
|
|
Preferred stock in DME Holdings
|
|
|
5,266
|
|
|
|
-
|
|
|
|
5,266
|
|
Contingent consideration
|
|
|
1,225
|
|
|
|
(380
|
)
|
|
|
845
|
|
Total Consideration
|
|
$
|
57,587
|
|
|
$
|
(634
|
)
|
|
$
|
56,953
|
|
|
(1)
|
Included in related party note payable on the condensed consolidated balance sheet.
|
As a result of the adjustment to net working capital adjustment, $0.2 million in shares of preferred stock in DME Holdings were cancelled and forfeited and the remaining difference between the adjustment and the value of the preferred stock cancelled and forfeited was paid by the sellers to DME Holdings.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining finalized third-party valuations of certain intangible assets, and gathering information on all assets acquired and liabilities assumed, including tax attributes, thus, all amounts are preliminary and are subject to change as these provisional estimates are finalized.
21
(in thousands)
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Accounts receivable
|
|
$
|
5,363
|
|
|
$
|
90
|
|
|
$
|
5,453
|
|
Inventories
|
|
|
1,546
|
|
|
|
-
|
|
|
|
1,546
|
|
Other assets
|
|
|
503
|
|
|
|
-
|
|
|
|
503
|
|
Fixed assets
|
|
|
852
|
|
|
|
-
|
|
|
|
852
|
|
Equipment held for rent
|
|
|
8,470
|
|
|
|
(294
|
)
|
|
|
8,176
|
|
Goodwill
|
|
|
46,222
|
|
|
|
(782
|
)
|
|
|
45,440
|
|
Tradename
|
|
|
6,900
|
|
|
|
-
|
|
|
|
6,900
|
|
Non-compete agreements
|
|
|
1,450
|
|
|
|
-
|
|
|
|
1,450
|
|
Right of use asset
|
|
|
4,205
|
|
|
|
-
|
|
|
|
4,205
|
|
Current liabilities
|
|
|
(6,374
|
)
|
|
|
352
|
|
|
|
(6,022
|
)
|
Operating lease liabilities
|
|
|
(4,285
|
)
|
|
|
-
|
|
|
|
(4,285
|
)
|
Non-controlling interest
|
|
|
(7,265
|
)
|
|
|
-
|
|
|
|
(7,265
|
)
|
Net Assets Acquired
|
|
$
|
57,587
|
|
|
$
|
(634
|
)
|
|
$
|
56,953
|
|
The outstanding balances of the note payable to seller, debt assumed on the revolving credit facility, and the preferred stock in DME Holdings approximates fair value based upon current rates and terms available for similar instruments.
The trade name was determined to have a fair value of $6.9 million. The valuation of the trade name was based on a relief from royalty method. The key assumptions in applying the relief from royalty approach are as follows: royalty rate of 3.0% and a discount rate of 20%.
The non-compete agreements were determined to have a fair value of $1.5 million. The valuation of the non-compete agreements was based on a lost profits method. The key assumptions in applying the lost profits method are as follows; probability adjusted EBITDA of the acquired businesses and a discount rate of 20%.
The contingent consideration arrangement requires the Company to pay up to $2.4 million of additional consideration to the acquired companies’ former shareholders if certain earnings before interest, taxes, depreciation and amortization (
EBITDA
) thresholds, as adjusted per the terms of the purchase agreement, are achieved for the 12 months ended December 31, 2018 and 2019. Under the Transaction Agreement, payment of the contingent consideration for any period is subject to satisfaction of the applicable EBITDA threshold. The fair value of the contingent consideration arrangement at the acquisition date was $0.8 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 as follows: 33.5% volatility, and EBITDA forecasts of the acquired businesses. The contingent consideration is included within the current portion of related party payables in the consolidated balance sheets.
These fair value measurements are based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820,
Fair Value Measurement
.
Upon a subsequent sale of DME Inc., certain members of the DME Inc. management team will be entitled to a contingent bonus based on a percentage of the proceeds of the sale less the Company’s invested capital in DME Inc.
Of the $8.4 million of acquired identifiable intangible assets, $6.9 million was provisionally assigned to tradenames and $1.5 million was provisionally assigned to non-compete assets, which are associated with the former sellers of the businesses. All tradenames acquired have an expected life of 10 years over which they will be amortized on a straight-line basis, which matches the pattern of economic use of these assets. The non-compete agreements have a weighted-average expected life of 4.2 years. All non-compete agreements will be amortized on a straight-line basis, which approximates the pattern of economic use. Neither tradenames nor the non-compete agreements have renewal terms or are expected to have any net realizable value at the end of their useful lives.
22
The $45.
4 million of goodwill was assigned to the durable medical equipment segment and is attributable primarily to expected synergies and the assembled workforce of the acquired businesses. Approximately $20.5 million of the goodwill is expected to be deductibl
e for income tax purposes. This amount is preliminary and subject to change as the provisional estimate is finalized.
The fair value of the 19.9% non-controlling interest in acquired companies is provisionally estimated to be $7.3 million. The fair value of the non-controlling interest was estimated based on the purchase price paid by the Company for its 80.1% of the acquired business since the non-controlling interest holders hold equity in DME Inc., which allows the holders to share in at least the same benefits inured from the acquisition as the Company.
The Company has not recorded any deferred tax amounts associated with differences between income tax basis and the stepped up basis of financial statement basis amounts in its preliminary purchase allocation of consideration transferred for the acquired businesses. The Company is in the process of obtaining the income tax basis amounts related to assets acquired and liabilities assumed. As a result, the related deferred tax balance sheet amounts and any potentially impacted income tax provision or benefit will be recorded once the information becomes available and is evaluated by the Company. The Company expects these provisional amounts to be resolved prior to the end of fiscal year 2019.
The Company recognized $2.0 million of acquisition costs that were expensed in the nine months ended March 31, 2019. These costs are included in general and administrative expenses in the accompanying condensed consolidated statement of operations. The Company also incurred $0.4 million in costs associated with issuing debt to finance the cost of the acquired businesses, which are debt issuance costs that are amortized over the term of the debt using the effective interest rate method.
The amounts of revenue and net loss of the acquired business included in the Company’s condensed consolidated statement of operations from the date of acquisition through March 31, 2019 is $29.0 million and $0.1 million, respectively.
Supplemental Pro Forma Information
The pro forma results presented below were prepared pursuant to the requirements of ASC Topic 805,
Business Combinations,
and give effect to the acquisition as if it had been consummated on July 1, 2017. The pro forma results have been prepared for comparative purposes only and do not necessarily represent what revenue or results of operations would have been had the acquisition been completed on July 1, 2017. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved by the Company.
|
|
For the three months ended March 31,
|
|
|
For the nine months ended March 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
14,084
|
|
|
$
|
10,939
|
|
|
$
|
44,392
|
|
|
$
|
38,735
|
|
Net loss
|
|
|
4,201
|
|
|
|
(3,027
|
)
|
|
|
(1,217
|
)
|
|
|
(8,679
|
)
|
Net loss attributable to Great Elm Capital Group
|
|
|
4,236
|
|
|
|
(3,270
|
)
|
|
|
(1,057
|
)
|
|
|
(8,685
|
)
|
These pro forma results presented include adjustments to historical operating results include the following activity related to the acquisition: (a) interest expenses incurred on the debt paid down and borrowed upon closing; (b) dividends on preferred stock in subsidiary; (c) amortization of intangible assets acquired; and (d) reclassification of non-recurring transaction costs to the prior period.
5. 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.
23
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 agreement with Corbel Capital Partners SBIC, L.P. (
Corbel
) (the
Corbel Facility
). 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 Northwest and was one of the sellers in our acquisition of the business. As a result of the acquisition, at March 31, 2019 Corbel holds preferred stock of DME Holdings and a non-controlling interest in DME Inc. Pursuant to the Corbel Facility, Corbel was paid a structuring fee, will be paid an ongoing quarterly monitoring fee, and may be paid a deferred structuring fee if the loans are subject to early repayment. See Note 11 - Borrowings for additional information on the Corbel Facility and Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary.
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. See Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary. Additionally, the Company has a contingent liability to the sellers for $1.0 million, which is included in the current portion of related party payables on the balance sheet. See Note 4 – Acquisition for additional details.
As a result of measurement period adjustments to the net working capital discussed in Note 4 – Acquisition, $0.2 million in shares of preferred stock in DME Holdings were cancelled and forfeited and the remaining difference between the adjustment and the value of the preferred stock cancelled and forfeited was paid by the sellers to DME Holdings. During the three months ended March 31, 2019, the Company redeemed $1.5 million in shares of preferred stock in DME Holdings from Corbel.
Investment Management
The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC. Under these agreements, GECM receives administrative fees, management fees based on GECC’s assets (other than cash and cash equivalents) and incentive fees if GECC has net capital gains or if its net investment income exceeds a specified hurdle rate. Fees under the agreements began to accrue on November 4, 2016. See Note 3 – Revenue for additional discussions of the fee arrangements.
All of the Company’s investment management revenue recognized for the periods presented was generated from the management and administration of GECC. Additionally, the Company receives dividends from its investment in GECC and earns unrealized profits and losses based on the mark-to-market performance of GECC. See Note 8 – Fair Value Measurements.
The following tables summarize activity and outstanding balances between GECC and the Company.
|
|
For the three months ended March 31,
|
|
|
For the nine months ended March 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Change in unrealized gain (loss) on investment in GECC recorded in the period
|
|
$
|
807
|
|
|
$
|
(1,219
|
)
|
|
$
|
(1,927
|
)
|
|
$
|
(2,753
|
)
|
GECC dividends recorded in the period
|
|
|
490
|
|
|
|
490
|
|
|
|
1,941
|
|
|
|
1,862
|
|
(in thousands)
|
|
March 31, 2019
|
|
|
June 30, 2018
|
|
Dividends receivable from GECC
|
|
$
|
609
|
|
|
$
|
163
|
|
Investment management revenues receivable from GECC
(1)
|
|
|
1,085
|
|
|
|
4,094
|
|
(1)
|
Investment management fees receivable from GECC as of June 30, 2018 include incentive fee receivables of $2.9 million which have been reversed as a result of the adoption of Topic 606 on July 1, 2018. See Note 2 – Summary of Significant Accounting Policies.
|
Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets.
24
The Company is the beneficial owner of approximately 18.80% of the outstanding shares of GECC, and the Company’s Chief Executive Officer is also the Chief Executive Officer of GECC and Chief Investment Officer of GECM, in addition to being a member o
f the board of directors of the Company and chairman of the board of GECC. The Company’s President and Chief Operating Officer is also the Chief Operating Officer, Chief Compliance Officer and General Counsel of GECM and the Chief Compliance Officer of GE
CC.
GECM has a profit sharing agreement with the Company’s majority-owned subsidiary GECC GP Corp. (
Profit Sharing Agreement
). Under the Profit Sharing Agreement, GECM’s profit from GECC is paid to GECC GP Corp. Since its inception in November 2016, GECM has operated at a cumulative loss through March 31, 2019; correspondingly, no profits were available to GECC GP Corp. under the profit sharing agreement. Certain employees of the Company have a non-controlling interest in GECC GP Corp. See Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary.
The Company’s wholly-owned subsidiary, Great Elm Opportunities GP, Inc. (
GEOF GP
) serves as the general partner of Great Elm Opportunities Fund I, LP (
GEOF
). As the general partner, GEOF GP provides administrative services and manages the investment portfolio of GEOF. Based on the performance of GEOF’s investment portfolio, GEOF GP may be entitled to certain incentive allocations. GEOF began investing in July 2018 and through March 31, 2019 no incentive allocations have been made to GEOF GP.
As part of the entry into the investment management business in November 2016, the Company entered into a cost sharing agreements with MAST Capital Management, LLC (
MAST Capital
) and acquired certain assets from MAST Capital. In consideration for the assets acquired, GECC GP Corp. issued a senior secured note payable (
GP Corp. Note
). In addition, the Company issued warrants to purchase 54,733 shares of the Company’s common stock (
MAST Warrants
). During the nine months ended March 31, 2018 the Company paid $0.3 million in non-reimbursable expenses in connection with the cost sharing agreement. There was no such activity for the nine months ended March 31, 2019 as a result of the separation discussed below.
In September 2017, the Company entered into a separation agreement with MAST. The separation agreement contemplated, among other things, a reduction in the principal balance of the GP Corp. Note, the termination of the cost sharing agreement and the exchange of the MAST warrants for new warrants to purchase 420,000 shares of the Company’s common stock (
New MAST Warrants
). As a result of the separation, $0.5 million of non-vested stock-based compensation was forfeited. In July 2018, MAST Capital exercised the New MAST Warrants. MAST Capital is the beneficial owner of approximately 9.6% of the Company’s outstanding common stock as of March 31, 2019. See Note 11 - Borrowings for additional discussion of the GP Corp. Note and Note 13 – Stockholders’ Equity for additional discussion of the warrant activity.
Real Estate
In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a 19.9% interest in Great Elm FM Holdings, Inc. (
GE FM Holdings
). See Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary.
25
6. Fixed Assets
The Company’s fixed assets consist of its leased real estate assets, 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):
(in thousands)
|
|
March 31, 2019
|
|
|
June 30, 2018
|
|
Real Estate Assets
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
43,355
|
|
|
$
|
43,355
|
|
Land and site improvements
|
|
|
9,170
|
|
|
|
9,170
|
|
Tenant improvements
|
|
|
3,500
|
|
|
|
3,500
|
|
|
|
|
56,025
|
|
|
|
56,025
|
|
Accumulated depreciation
|
|
|
(1,308
|
)
|
|
|
(384
|
)
|
Net carrying amount
|
|
$
|
54,717
|
|
|
$
|
55,641
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
667
|
|
|
$
|
45
|
|
Vehicles
|
|
|
188
|
|
|
|
-
|
|
Computer equipment and software
|
|
|
174
|
|
|
|
-
|
|
Furniture and fixtures
|
|
|
300
|
|
|
|
27
|
|
Sleep study equipment
|
|
|
227
|
|
|
|
-
|
|
|
|
|
1,556
|
|
|
|
72
|
|
Accumulated depreciation
|
|
|
(215
|
)
|
|
|
(31
|
)
|
Net carrying amount
|
|
$
|
1,341
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
Medical Equipment Held for Rental
|
|
|
|
|
|
|
|
|
Medical equipment held for rental
|
|
$
|
12,314
|
|
|
$
|
-
|
|
Accumulated depreciation
|
|
|
(3,524
|
)
|
|
|
-
|
|
Net carrying amount
|
|
$
|
8,790
|
|
|
$
|
-
|
|
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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Depreciation and amortization
|
|
$
|
441
|
|
|
$
|
80
|
|
|
$
|
1,134
|
|
|
$
|
91
|
|
Cost of durable medical equipment rentals
|
|
|
1,904
|
|
|
|
-
|
|
|
|
4,066
|
|
|
|
-
|
|
Total depreciation expense
|
|
$
|
2,345
|
|
|
$
|
80
|
|
|
$
|
5,200
|
|
|
$
|
91
|
|
7. Lessor Operating Leases
Medical Equipment Leases
Through its majority-owned subsidiary DME Inc., and the subsidiaries of DME Inc., 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.
26
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 lea
ses 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 receivable
s under the terms of the current leases.
Real Estate Leases
The Company’s majority-owned subsidiary CRIC IT Fort Myers LLC (
Property Owner
) owns a fee simple interest in two Class A office buildings, Gartner I and Gartner II (collectively, the
Property
). The Property is fully leased, on a triple net basis, to Gartner, Inc. (
Gartner
) until March 31, 2030, which may be extended at the option of Gartner in accordance with the terms of the lease. The Gartner I lease contains two five-year extensions and the Gartner II lease contains three five-year extensions (collectively, the
Leases
). Under the terms of the Leases, the renewal rates are equal to 95% of the then fair market rent, and the tenant does not have a purchase option at the end of the lease term. The leases require Gartner to make a base monthly lease payment of approximately $0.4 million as calculated on a straight line basis over the remaining expected lease term plus additional rent payments for additional costs. Additional rental payments are due for Property Owner costs, such as property taxes, management fees, and insurance costs, as incurred. See Note 3 – Revenue for additional discussion of rental revenues.
The Property is subject to mortgage, security agreement and assignment of leases and rents with the senior and subordinated lenders, which is further described in Note 11 - Borrowings. The Property Owner has assigned all rights, title and interest in and to the Property and the Leases to the senior and subordinated lenders and all amounts received are paid to a trust which funds the operating costs associated with the Property. The Company does not have rights to these rent payments while the borrowings remain outstanding.
The Company expects to derive value from the residual value at the end of the existing lease term by further leasing the assets or through a sale transaction.
Rental income from real estate leases is summarized in the following table:
(in thousands)
|
|
For the three months ended March 31, 2019
|
|
|
For the nine months ended March 31, 2019
|
|
Revenues from base rents
|
|
$
|
1,150
|
|
|
$
|
3,452
|
|
Revenues from additional rental payments
|
|
|
122
|
|
|
|
736
|
|
Total rental revenues
|
|
$
|
1,272
|
|
|
$
|
4,188
|
|
The following table summarizes the base rents for the remaining lease term:
(in thousands)
|
|
Base Rent Payments
|
|
For the three months ending June 30, 2019
|
|
$
|
1,021
|
|
For the year ending June 30, 2020
|
|
|
4,120
|
|
For the year ending June 30, 2021
|
|
|
4,213
|
|
For the year ending June 30, 2022
|
|
|
4,312
|
|
For the year ending June 30, 2023
|
|
|
4,420
|
|
Thereafter
|
|
|
33,203
|
|
Total base rent
|
|
$
|
51,289
|
|
8. 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.
27
US GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in val
uation 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 (in thousands):
|
|
Fair Value as of March 31, 2019
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in GECC
|
|
$
|
11,805
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,805
|
|
Restricted investment in GECC
|
|
|
4,440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,440
|
|
Total assets
|
|
$
|
16,245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,245
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
961
|
|
|
$
|
961
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
961
|
|
|
$
|
961
|
|
The only recurring fair value measurements at June 30, 2018 was the investment in GECC which did not have any restrictions at that date. The investment in GECC was valued using Level 1 inputs at June 30, 2018.
The following is a reconciliation of changes in contingent consideration, a Level 3 liability, for the three and nine months ended March 31, 2019:
(in thousands)
|
|
|
|
Balance as of June 30, 2018
|
$
|
-
|
|
Additions
|
|
845
|
|
Balance as of September 30, 2018
|
|
845
|
|
Change in fair value
|
|
-
|
|
Balance as of December 30, 2018
|
|
845
|
|
Change in fair value
|
|
116
|
|
Balance as of March 31, 2019
|
$
|
961
|
|
There were no Level 3 assets or liabilities held during the three and nine months ended March 31, 2018.
28
Contingent consideration is included within the current portion of related party payables in the consolidated balance sheets. The contingent consideration arrangeme
nt requires the Company to pay up to $2.4 million of additional consideration to the acquired companies’ former shareholders if certain EBITDA thresholds, as adjusted per the terms of the purchase agreement, are achieved for the 12 months ended December 31
, 2018 and 2019. 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 September 7, 2018 are as follows: 33.5% volatility and rela
ted EBITDA forecasts of the acquired businesses for the twelve months ended December 31, 2018 and 2019. A fair value of $0.8 million was calculated as of the acquisition date. The fair value of the contingent consideration increased $0.1 million during t
he three months ended March 31, 2019 to $1.0 million. The valuation as of March 31, 2019 utilized a 39.8% volatility rate. The related charge is included within sales, general and administrative expenses.
The ultimate payout of the contingent consideration will be based on actual results achieved. As the fair value of the contingent consideration changes until finalized with the results for the twelve months ended December 31, 2019, these changes may have a material impact on earnings. The Company determined that the EBITDA achieved, as adjusted per terms of the contract, for the 12 months ended December 31, 2018 was below the earnout threshold for payout, however, final determination is subject to a review process with the sellers. A full or partial contingent consideration payment of up to $2.4 million may be due to the sellers following completion of the review process or if the applicable targets are met during the 12 months ended December 31, 2019.
The Company is the beneficial owner of approximately 18.80% (or 1,966,667 shares) of the outstanding shares of GECC and values its ownership based on the NASDAQ-listed market price of GECC common stock (a Level 1 input in accordance with the US GAAP fair value hierarchy).
The Company recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the nine months ended March 31, 2019 and 2018.
See Note 11 - Borrowings for additional discussion related to the fair value of notes payable. The carrying value of all other financial assets and liabilities approximate their fair values.
9. Goodwill and Other Intangible Assets
The Company’s investment management and real estate segments include identifiable intangible assets acquired through acquisitions in prior years. In connection with the acquisition of the durable medical equipment businesses, the Company has also recognized goodwill and identifiable intangible assets associated with the tradenames and non-compete agreements. See Note 4 – Acquisition.
Goodwill of $45.4 million presented on the condensed consolidated balance sheet consists only of the goodwill acquired as part of the acquisition of the durable medical equipment businesses in September 2018. During the three months ended March 31, 2019 we recognized adjustments to goodwill which correspond to adjustments to provisional amounts assigned to acquired assets and liabilities. See Note 4 – Acquisition for additional details. There was no goodwill as of June 30, 2018.
29
The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in
thousands):
|
|
As of March 31, 2019
|
|
|
As of June 30, 2018
|
|
(in thousands)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Durable Medical Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
$
|
6,900
|
|
|
$
|
(403
|
)
|
|
$
|
6,497
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-compete agreements
|
|
|
1,450
|
|
|
|
(169
|
)
|
|
|
1,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,350
|
|
|
|
(572
|
)
|
|
|
7,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management agreement
|
|
|
3,900
|
|
|
|
(1,180
|
)
|
|
|
2,720
|
|
|
|
3,900
|
|
|
|
(789
|
)
|
|
|
3,111
|
|
Assembled workforce
|
|
|
526
|
|
|
|
(159
|
)
|
|
|
367
|
|
|
|
526
|
|
|
|
(106
|
)
|
|
|
420
|
|
|
|
|
4,426
|
|
|
|
(1,339
|
)
|
|
|
3,087
|
|
|
|
4,426
|
|
|
|
(895
|
)
|
|
|
3,531
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease
|
|
|
6,028
|
|
|
|
(534
|
)
|
|
|
5,494
|
|
|
|
6,028
|
|
|
|
(159
|
)
|
|
|
5,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,804
|
|
|
$
|
(2,445
|
)
|
|
$
|
16,359
|
|
|
$
|
10,454
|
|
|
$
|
(1,054
|
)
|
|
$
|
9,400
|
|
Aggregate Amortization Expense:
|
|
2019
|
|
|
|
|
2018
|
|
For the three months ended March 31,
|
|
$
|
546
|
|
|
|
|
$
|
169
|
|
For the nine months ended March 31,
|
|
|
1,391
|
|
|
|
|
|
472
|
|
Estimated Amortization Expense:
|
|
|
|
|
For the three months ending June 30, 2019
|
|
$
|
546
|
|
For the year ending June 30, 2020
|
|
|
2,082
|
|
For the year ending June 30, 2021
|
|
|
1,938
|
|
For the year ending June 30, 2022
|
|
|
1,865
|
|
For the year ending June 30, 2023
|
|
|
1,798
|
|
30
10. 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, 2019
|
|
|
June 30, 2018
|
|
Facilities
|
|
|
|
|
|
|
|
|
Right of use assets
|
|
$
|
5,362
|
|
|
$
|
1,521
|
|
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities
|
|
|
1,284
|
|
|
|
336
|
|
Lease liabilities, net of current portion
|
|
|
4,351
|
|
|
|
1,304
|
|
Total liabilities
|
|
$
|
5,635
|
|
|
$
|
1,640
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life
|
|
4.3 years
|
|
|
6.3 years
|
|
Weighted-average discount rate
|
|
|
11.6
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
Vehicles
|
|
|
|
|
|
|
|
|
Right of use assets
|
|
$
|
84
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities
|
|
|
18
|
|
|
|
-
|
|
Lease liabilities, net of current portion
|
|
|
66
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
84
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life
|
|
3.9 years
|
|
|
n/a
|
|
Weighted-average discount rate
|
|
|
12.3
|
%
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
|
|
|
|
|
|
Right of use assets
|
|
$
|
91
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities
|
|
|
31
|
|
|
|
-
|
|
Lease liabilities, net of current portion
|
|
|
60
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
91
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life
|
|
2.8 years
|
|
|
n/a
|
|
Weighted-average discount rate
|
|
|
12.5
|
%
|
|
n/a
|
|
As of March 31, 2019, the Company had remaining right of use assets of $5.5 million and lease liabilities of $5.8 million (consisting of $1.3 million in current portion of lease liabilities and $4.5 million in lease liabilities, net of current portion on the condensed consolidated balance sheet) related to the leases discussed herein.
31
Operating lease costs are included in the operating expense associat
ed 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 i
ncluded 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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
527
|
|
|
$
|
84
|
|
|
$
|
1,248
|
|
|
$
|
268
|
|
Cash paid for operating leases
|
|
|
530
|
|
|
|
82
|
|
|
|
1,229
|
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
-
|
|
Cash paid for operating leases
|
|
|
9
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
-
|
|
Cash paid for operating leases
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
The following table summarizes the Company’s undiscounted cash payment obligations for its operating leases (in thousands):
(in thousands)
|
|
|
|
|
For the three months ending June 30, 2019
|
|
$
|
518
|
|
For the year ending June 30, 2020
|
|
|
1,855
|
|
For the year ending June 30, 2021
|
|
|
1,717
|
|
For the year ending June 30, 2022
|
|
|
1,470
|
|
For the year ending June 30, 2023
|
|
|
883
|
|
For the year ending June 30, 2024
|
|
|
548
|
|
Thereafter
|
|
|
418
|
|
Total lease payments
|
|
$
|
7,409
|
|
Imputed interest
|
|
|
(1,599
|
)
|
Total lease liabilities
|
|
$
|
5,810
|
|
Durable Medical Equipment
As part of the acquisition discussed in Note 4 – Acquisition, the Company assumed leases for facilities and vehicles. The facility leases include offices, retail and warehouse space and sleep labs. The leases have original or amended terms ranging from 60 to 183 months, some of which include an additional option to extend the lease for up to 180 months. At the date of acquisition, the remaining lease terms ranged from 3 to 96 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.
32
Investment Management and General Corporate
The Company entered into a lease for office space located in Waltham, MA. This office space is allocated between the investment management and general corporate segments. On the commencement date of the lease, the non-cancellable term was for 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.
11. Borrowings
Related party borrowings of the Company’s subsidiaries are summarized in the following table:
(in thousands)
|
|
Subsidiaries
|
|
March 31, 2019
|
|
|
June 30, 2018
|
|
Corbel Facility
|
|
DME Inc. and subsidiaries
|
|
$
|
24,232
|
|
|
$
|
-
|
|
GP Corp. Note
|
|
GECC GP Corp.
|
|
|
3,224
|
|
|
|
3,224
|
|
Total principal
|
|
|
|
$
|
27,456
|
|
|
$
|
3,224
|
|
Unamortized debt issuance cost
|
|
|
|
|
(342
|
)
|
|
|
-
|
|
Total long-term related party notes payable
|
|
|
|
|
27,114
|
|
|
|
3,224
|
|
Less current portion of related party notes payable
|
|
|
|
|
(1,326
|
)
|
|
|
-
|
|
Related party notes payable, net of current portion
|
|
|
|
$
|
25,788
|
|
|
$
|
3,224
|
|
The Company’s subsidiaries’ other outstanding borrowings are summarized in the following table:
(in thousands)
|
|
Subsidiaries
|
|
March 31, 2019
|
|
|
June 30, 2018
|
|
DME Revolver
|
|
DME Inc. and subsidiaries
|
|
$
|
7,000
|
|
|
$
|
-
|
|
Senior Note
|
|
CRIC IT
|
|
$
|
52,682
|
|
|
|
54,161
|
|
Subordinated Note
|
|
CRIC IT
|
|
|
3,157
|
|
|
|
2,823
|
|
Total principal
|
|
|
|
$
|
62,839
|
|
|
$
|
56,984
|
|
Unamortized debt premiums
|
|
|
|
|
3,188
|
|
|
|
3,131
|
|
Unamortized debt discounts and issuance costs
|
|
|
|
|
(2,323
|
)
|
|
|
(2,484
|
)
|
Total long term debt
|
|
|
|
|
63,704
|
|
|
|
57,631
|
|
Less current portion of long-term debt
|
|
|
|
|
(2,118
|
)
|
|
|
(1,999
|
)
|
Long term debt, net of current portion
|
|
|
|
$
|
61,586
|
|
|
$
|
55,632
|
|
The Company incurred interest expense of $1.7 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. The Company incurred interest expense of $4.5 million and $0.4 million for the nine months ended March 31, 2019 and 2018, respectively.
33
The Company’s aggregate future required princ
ipal debt repayments are summarized in the following table:
(in thousands)
|
|
Principal Due
|
|
For the three months ending June 30, 2019
|
|
$
|
832
|
|
For the year ending June 30, 2020
|
|
|
3,485
|
|
For the year ending June 30, 2021
|
|
|
10,652
|
|
For the year ending June 30, 2022
|
|
|
3,833
|
|
For the year ending June 30, 2023
|
|
|
4,027
|
|
For the year ending June 30, 2024
|
|
|
21,901
|
|
Thereafter
|
|
|
58,677
|
|
Total
|
|
$
|
103,407
|
|
|
|
|
|
|
Outstanding principal on related party borrowings
|
|
$
|
27,456
|
|
Outstanding principal on other borrowings
|
|
|
62,839
|
|
Future interest to be paid-in-kind
|
|
|
13,112
|
|
Total future required principal payments
|
|
$
|
103,407
|
|
Additional details of each borrowing by operating segment are discussed below.
Durable Medical Equipment
In September 2018, in conjunction with the acquisition of 80.1% of Great Elm DME, Inc., the Company assumed a secured note (
Corbel Facility
) with a principal balance of $8.5 million, which was amended and increased to $25 million concurrent with the closing of the acquisition described in Note 4 – Acquisition. In addition, the Company assumed and expanded a revolving line of credit agreement (
DME Revolver
) with a principal balance of $0.8 million, which was amended and increased to $6.3 million at the date of acquisition.
The Corbel Facility matures on August 31, 2023, accrues interest at a variable rate of three-month LIBOR plus 10% per annum and is secured by the assets of the durable medical equipment business. At March 31, 2019 the interest rate was 12.6%. The Corbel Facility requires quarterly interest payments and principal payments of $0.3 million through the maturity date with the final principal balance due at maturity. In addition, beginning with the quarter ending December 31, 2018, the Company is required to make additional quarterly principal payments based on a percentage of excess cash flows generated by the durable medical equipment business operations. The Company has the option to prepay the borrowings outstanding in whole or in part subject to certain prepayment penalties ranging from 1% - 5% of the early payment of the principal, based on the time that the loan has been outstanding through the first five years of the loan.
The Corbel Facility is held by a related party, Corbel, which holds a non-controlling interest in DME Inc. and preferred stock issued by DME Holdings. In connection with the issuance of the amended Corbel Facility, the borrowers paid Corbel a one-time structuring fee of $375,000, which is included in debt issuance costs. See Note 5 – Related Party Transactions and Note 13 – Non-Controlling Interests and Preferred Stock of Subsidiary.
DME Inc. is required to pay to Corbel, as agent of the Corbel Facility, a quarterly monitoring fee of $25,000 while the borrowings remain outstanding. In addition, 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.
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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Principal payments
|
|
$
|
455
|
|
|
$
|
-
|
|
|
$
|
768
|
|
|
$
|
-
|
|
Interest expense
|
|
|
765
|
|
|
|
-
|
|
|
|
1,755
|
|
|
|
-
|
|
34
The DME Revolver had a balance of $7.0 million at March 31, 2019 and 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 August 30, 2020 and accrue interest at a variable rate of the prime rate plus 0.40% per annum. At March 31, 2019 the interest rate was 5.9%. Interest is payable monthly in arrears. The Company has the option to prepay the borrowings without any penalty. If the DME Revolver is terminated within the first year, a termination fee equal to 3% of the original credit limit will be due. The Company has classified all borrowings under the DME Revolver as long term in the condensed consolidated balance sheets based on the maturity date of the facility.
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 Corbel Facility and DME Revolver each include covenants that restrict DME 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 of DME Inc. DME Inc. must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the DME Inc. EBITDA levels.
As of March 31, 2019, the fair value approximates the carrying value for both the Corbel Facility and the DME Revolver.
Investment Management
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. At March 31, 2019 the interest rate was 5.6%. The GP Corp. Note requires quarterly interest only payments and annual principal payments of $0.08 million, based on the Company’s fiscal year ending June 30.
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 the GP Corp. Note. Additionally, GECC GP Corp. is required to prepay the GP Corp. Note upon certain material liquidation transactions including any termination of the Profit Sharing Agreement.
The GP Corp. Note is held by MAST Capital, a related party. 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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Principal payments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense
|
|
|
44
|
|
|
|
39
|
|
|
|
130
|
|
|
|
173
|
|
The Company estimated the fair value of the GP Corp. Note as of March 31, 2019 and June 30, 2018, on a non-recurring basis, using Level 3 inputs. As of March 31, 2019 and June 30, 2018, the carrying value of the note approximated the fair value.
Real Estate
In March 2018, in connection with the acquisition of the real estate business, the Company assumed a senior secured note (
Senior Note
) with a principal balance of $54.8 million and a subordinated note (
Subordinated Note
) with a principal balance of $2.7 million at the date of acquisition. The Senior Note was recorded at an estimated fair value of $52.2 million, reflecting a discount of $2.6 million from the face amount; and the Subordinated Note was recorded at $5.8 million, reflecting a premium of $3.1 million. The discount and premium amortize over the life of the notes.
35
The Senior Note matures on March 15, 2030, accrues interest at a rate of 3.49% per annum and is secured by a first lien mortgage on the Property
and an Assignment of Leases and Rents. The Senior Note requires monthly principal and interest payments through the maturity date, with the last payment of $18.4 million on March 15, 2030. 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 specified U.S. Treasury security over the remaining
average life of the Senior Note.
The Subordinated Note matures on March 15, 2030, accrues interest at a rate of 15.0% per annum, and is secured by a second lien mortgage on the Property and an Assignment of Leases and Rents. The Subordinated Note is a capital appreciation note, whereby the monthly interest is capitalized to the principal balance and due at maturity. Accordingly, a $16.3 million payment is due on March 15, 2030. The principal and interest due on the Subordinate 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 U.S. Treasury security over the remaining average life of the Subordinated Note.
The note agreements include negative covenants that restrict the Property Owner’s 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 note 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. See Note 7 – Lessor Operating Leases.
As of March 31, 2019 and June 30, 2018, the fair value approximates the carrying value for both the Senior Note and Subordinated Note.
12. Stockholders’ Equity
Performance Shares (Restricted Stock Awards)
The Company did not grant any restricted stock awards during the three and nine months ended March 31, 2019. As of March 31, 2019, the Company had 732,909 restricted stock awards that carry both performance and service conditions to vest. The awards vest over a five-year service period, with the first twenty percent of the award vesting on the first anniversary of the grant, and the remaining award vesting quarterly through November 3, 2021. In addition, the restricted stock awards are subject to pro-rated forfeiture based on the collection of cumulative fees under the GECC investment management agreement of at least $40 million for the five-year period ended November 3, 2021.
The Company estimates that approximately 579,000 of the restricted stock awards are probable of vesting under the performance condition. The Company accounts for forfeitures of the restricted stock awards in the period incurred. There were no forfeitures during the nine months ended March 31, 2019.
For the three and nine months ended March 31, 2019, the Company recognized compensation cost totaling a benefit of $0.1 million and of $0.1 million, respectively, associated with the performance-based awards. For the three and nine months ended March 31, 2018, the Company recognized compensation cost totaling $0.4 million and $0.8 million, respectively, associated with the performance-based awards.
36
The following table summarizes the Company’s restricted stock award activity as of and throu
gh March 31, 2019 (in thousands, except per share amounts):
Restricted Stock Awards and Restricted Stock Units
|
|
Restricted Stock
|
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at June 30, 2018
|
|
|
767
|
|
|
$
|
3.92
|
|
Granted
|
|
|
186
|
|
|
|
3.43
|
|
Vested
|
|
|
(141
|
)
|
|
|
3.54
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
812
|
|
|
$
|
3.87
|
|
Stock Options
During the nine months ended March 31, 2019, the Company issued 60,000 stock options with an estimated grant date fair value of $0.1 million. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of its option awards. The assumptions used to value the stock options granted during the nine months ended March 31, 2019 consist of: expected volatilities between 58.9% and 59.2%; no expected dividend yields; risk-free rates between 3.12% and 3.13%; and expected terms between 6.3 and 6.5 years.
The following table summarizes the Company’s option award activity as of and through March 31, 2019 (in thousands, except per share amounts):
Options
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at June 30, 2018
|
|
|
2,676
|
|
|
$
|
4.31
|
|
|
|
7.44
|
|
|
$
|
70
|
|
Options granted
|
|
|
60
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2
|
)
|
|
|
3.20
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(86
|
)
|
|
|
3.62
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
2,648
|
|
|
$
|
4.32
|
|
|
|
6.64
|
|
|
$
|
1,514
|
|
Exercisable at March 31, 2019
|
|
|
1,694
|
|
|
$
|
4.73
|
|
|
|
5.56
|
|
|
$
|
880
|
|
Vested and expected to vest as of March 31, 2019
|
|
|
2,648
|
|
|
$
|
4.32
|
|
|
|
6.64
|
|
|
$
|
1,514
|
|
During the three and nine months ended March 31, 2019, the Company recognized total stock-based compensation associated with all restricted stock and stock options of $0.1 million and $0.9 million, respectively. During the three and nine months ended March 31, 2018, the Company recognized total stock based compensation associated with all restricted stock and stock options of $0.9 million and $3.6 million, respectively.
As of March 31, 2019, unrecognized compensation costs associated with outstanding stock and stock-linked awards totaled approximately $2.8 million.
Warrants
In July 2018, MAST Capital exercised their outstanding warrants for cash proceeds totaling $1.4 million. At March 31, 2019, no warrants remained outstanding.
37
13. Non-Controlling Interests and Preferred Stock of
Subsidiary
Holders of non-controlling interests (
NCI
) or preferred stock in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity or permanent equity. The following table summarizes the non-controlling interest and preferred stock of subsidiary balances on the condensed consolidated balance sheets:
(in thousands)
|
|
March 31, 2019
|
|
|
June 30, 2018
|
|
DME Holdings
|
|
|
|
|
|
|
|
|
Preferred stock classified as liability
|
|
$
|
3,552
|
|
|
$
|
-
|
|
DME Inc.
|
|
|
|
|
|
|
|
|
NCI classified as temporary equity
|
|
|
3,691
|
|
|
|
-
|
|
NCI classified as permanent equity
|
|
|
3,691
|
|
|
|
-
|
|
Total DME Inc.
|
|
|
10,934
|
|
|
|
-
|
|
GECC GP Corp.
|
|
|
|
|
|
|
|
|
NCI classified as permanent equity
|
|
|
(580
|
)
|
|
|
(465
|
)
|
GE FM Holdings
|
|
|
|
|
|
|
|
|
NCI classified as permanent equity
|
|
|
715
|
|
|
|
687
|
|
Total
|
|
$
|
11,069
|
|
|
$
|
222
|
|
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)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
DME Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock classified as liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
DME Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCI classified as temporary equity
|
|
|
1
|
|
|
|
-
|
|
|
|
59
|
|
|
|
-
|
|
NCI classified as permanent equity
|
|
|
1
|
|
|
|
-
|
|
|
|
59
|
|
|
|
-
|
|
Total DME Inc.
|
|
|
2
|
|
|
|
-
|
|
|
|
117
|
|
|
|
-
|
|
GECC GP Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCI classified as permanent equity
|
|
|
(46
|
)
|
|
|
(32
|
)
|
|
|
(116
|
)
|
|
|
(419
|
)
|
GE FM Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCI classified as permanent equity
|
|
|
9
|
|
|
|
4
|
|
|
|
29
|
|
|
|
4
|
|
Total
|
|
$
|
(35
|
)
|
|
$
|
(28
|
)
|
|
$
|
30
|
|
|
$
|
(415
|
)
|
Preferred stock in DME Holdings classified as liability
In connection with the acquisition of the acquired businesses on September 7, 2018, the Company issued 5,266 shares of preferred stock in DME Holdings valued at $1,000 per share at issuance. In January 2019, as a result of adjustments to the net working capital adjustment to the total consideration for the acquisition, 214 shares of preferred stock were cancelled and forfeited. In March 2019, the Company redeemed an additional 1,500 shares of preferred stock. As of March 31, 2019, 3,552 shares of preferred stock in DME Holdings remain outstanding.
38
The preferred shares provide for a 10% annual dividend, wh
ich is payable semi-annually. The preferred shares are mandatorily redeemable by the Company at their face value of $1,000 per share on the earlier of certain redemption events or September 7, 2038. The redemption events include a change in control, init
ial public offering, liquidation of DME Holdings, or failure to pay dividends. The preferred shares rank senior and have preference to the common shares of DME Holdings. The shares are non-voting, do not participate in the earnings of DME Holdings and co
ntain 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.
Under the terms of the preferred stock, DME Holdings must maintain a required level of capitalization. At the option of the Company, such capitalization is required to be an amount in cash and/or common stock of GECC, net of any debt of DME Holdings, with an aggregate value greater than or equal to 125% of the value of the shares of preferred stock. After August 31, 2019, at least 100% of the value of the shares of preferred stock must be held in cash.
If at any month end the value of the qualifying assets falls below the required threshold, the Company shall, as promptly as practicable, contribute additional assets to meet the capitalization requirements. Similarly, if at any month end the value of the qualifying assets exceeds the required threshold, the Company may remove the excess assets.
As of March 31, 2019, the Company contributed to DME Holdings GECC stock valued at approximately $4.4 million. This investment is classified as restricted investments in the consolidated balance sheet.
The holder of the preferred stock, Corbel, is also the holder of the
Corbel Facility
and the non-controlling interest in DME Inc. classified as temporary equity discussed below. See Note 5 – Related Party Transactions and Note 11 – Borrowings.
Non-controlling interest in DME Inc. classified as temporary equity
In connection with the acquisition of the acquired businesses on September 7, 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.
The holder of this non-controlling interest, Corbel, is also the holder of the
Corbel Facility
and the preferred stock in DME Holdings discussed above. See Note 5 – Related Party Transactions and Note 11 – Borrowings.
Non-controlling interest in DME Inc. classified as permanent equity
In connection with the acquisition of the acquired businesses on September 7, 2018, the Company issued one of the former owners, a 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.
39
GECC GP Corp. – Non-controlling interest classified as permanent equity
In September 2017, the Company eliminated the vesting provisions and removed the call rights for the GECC GP Corp. stock owned by employees of the Company. As a result of the elimination, the Company recognized stock-based compensation expense of $1.5 million, equal to the estimated fair value of the non-controlling interest held by our employees in GECC GP Corp.
GE 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 GE FM Holdings.
14. Income Tax
As of June 30, 2018, the Company had net operating loss (
NOL
) carryforwards for federal and state income tax purposes of approximately $1.7 billion and $197 million, respectively. The federal NOL carryforwards will expire from 2019 through 2037 with the exception of NOL carryforwards generated in fiscal year 2018 or later which can be carried forward indefinitely. The state NOL carryforwards will expire from 2019 through 2038. The Company assesses NOL carryforwards based on taxable income on an annual basis.
The Company’s tax provision for the three and nine months ended March 31, 2019 primarily consists of a provision for state taxes and the impact of the intraperiod tax allocation between continuing and discontinued operations. The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, discontinued operations) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations. During the three months ended March 31, 2019, the Company incurred a discrete tax charge within discontinued operations associated with the settlement agreement with another party (see Note 17 – Discontinued Operations). Accordingly, the discontinued operations included a tax provision of $1.2 million and a corresponding benefit of $1.2 million was recognized in the tax provision (benefit) for continuing operations.
40
15. Segment Information
The Company allocates resources based on four operating segments: durable medical equipment, investment management, real estate and general corporate.
The following tables illustrate results of operations by segment (in thousands):
|
|
For the three months ended March 31, 2019
|
|
(in thousands)
|
|
Durable Medical Equipment
|
|
|
Investment Management
|
|
|
Real Estate
|
|
|
General Corporate
|
|
|
Reconciliation to Consolidated Total
(1)
|
|
|
Consolidated Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
11,752
|
|
|
$
|
1,060
|
|
|
$
|
1,272
|
|
|
$
|
(5
|
)
|
|
$
|
5
|
|
|
$
|
14,084
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of durable medical equipment sold and services
|
|
|
(2,633
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,633
|
)
|
Cost of durable medical equipment rentals
|
|
|
(1,969
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,969
|
)
|
Depreciation and amortization
|
|
|
(371
|
)
|
|
|
(180
|
)
|
|
|
(436
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(987
|
)
|
Stock-based compensation
(2)
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
(102
|
)
|
Transaction costs
(3)
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
(82
|
)
|
Other selling, general and administrative
|
|
|
(5,891
|
)
|
|
|
(977
|
)
|
|
|
(131
|
)
|
|
|
(1,824
|
)
|
|
|
(5
|
)
|
|
|
(8,828
|
)
|
Total operating expenses
|
|
|
(10,871
|
)
|
|
|
(1,176
|
)
|
|
|
(567
|
)
|
|
|
(1,982
|
)
|
|
|
(5
|
)
|
|
|
(14,601
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(998
|
)
|
|
|
(47
|
)
|
|
|
(667
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,712
|
)
|
Other income (expense)
|
|
|
(400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,722
|
|
|
|
-
|
|
|
|
1,322
|
|
Total other expense, net
|
|
|
(1,398
|
)
|
|
|
(47
|
)
|
|
|
(667
|
)
|
|
|
1,722
|
|
|
|
-
|
|
|
|
(390
|
)
|
Total pre-tax income (loss) from continuing operations
|
|
$
|
(517
|
)
|
|
$
|
(163
|
)
|
|
$
|
38
|
|
|
$
|
(265
|
)
|
|
$
|
-
|
|
|
$
|
(907
|
)
|
|
|
For the three months ended March 31, 2018
|
|
(in thousands)
|
|
Durable Medical Equipment
(4)
|
|
|
Investment Management
|
|
|
Real Estate
(5)
|
|
|
General Corporate
|
|
|
Reconciliation to Consolidated Total
|
|
|
Consolidated Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
(791
|
)
|
|
$
|
343
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(448
|
)
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(136
|
)
|
|
|
(113
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(249
|
)
|
Stock-based compensation
(2)
|
|
|
-
|
|
|
|
(618
|
)
|
|
|
-
|
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
(918
|
)
|
Other general and administrative
|
|
|
-
|
|
|
|
(471
|
)
|
|
|
(21
|
)
|
|
|
(1,429
|
)
|
|
|
-
|
|
|
|
(1,921
|
)
|
Total operating expenses
|
|
|
-
|
|
|
|
(1,225
|
)
|
|
|
(134
|
)
|
|
|
(1,729
|
)
|
|
|
-
|
|
|
|
(3,088
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(186
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(225
|
)
|
Other income (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(655
|
)
|
|
|
-
|
|
|
|
(655
|
)
|
Total other expense, net
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(186
|
)
|
|
|
(655
|
)
|
|
|
-
|
|
|
|
(880
|
)
|
Total pre-tax income (loss) from continuing operations
|
|
$
|
-
|
|
|
$
|
(2,055
|
)
|
|
$
|
23
|
|
|
$
|
(2,384
|
)
|
|
$
|
-
|
|
|
$
|
(4,416
|
)
|
41
|
|
For the nine months ended March 31, 2019
|
|
(in thousands)
|
|
Durable Medical Equipment
(4)
|
|
|
Investment Management
|
|
|
Real Estate
|
|
|
General Corporate
|
|
|
Reconciliation to Consolidated Total
(1)
|
|
|
Consolidated Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
28,995
|
|
|
$
|
2,915
|
|
|
$
|
4,188
|
|
|
$
|
65
|
|
|
$
|
(65
|
)
|
|
$
|
36,098
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of durable medical equipment sold and services
|
|
|
(7,122
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,122
|
)
|
Cost of durable medical equipment rentals
|
|
|
(4,229
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,229
|
)
|
Depreciation and amortization
|
|
|
(774
|
)
|
|
|
(453
|
)
|
|
|
(1,298
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,525
|
)
|
Stock-based compensation
(2)
|
|
|
-
|
|
|
|
(601
|
)
|
|
|
-
|
|
|
|
(343
|
)
|
|
|
-
|
|
|
|
(944
|
)
|
Transaction costs
(3)
|
|
|
(551
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,534
|
)
|
|
|
-
|
|
|
|
(2,085
|
)
|
Other selling, general and administrative
|
|
|
(13,665
|
)
|
|
|
(2,585
|
)
|
|
|
(768
|
)
|
|
|
(4,967
|
)
|
|
|
65
|
|
|
|
(21,920
|
)
|
Total operating expenses
|
|
|
(26,341
|
)
|
|
|
(3,639
|
)
|
|
|
(2,066
|
)
|
|
|
(6,844
|
)
|
|
|
65
|
|
|
|
(38,825
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,365
|
)
|
|
|
(135
|
)
|
|
|
(1,995
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,495
|
)
|
Other income (expense)
|
|
|
(380
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
503
|
|
|
|
-
|
|
|
|
123
|
|
Total other income (expense), net
|
|
|
(2,745
|
)
|
|
|
(135
|
)
|
|
|
(1,995
|
)
|
|
|
503
|
|
|
|
-
|
|
|
|
(4,372
|
)
|
Total pre-tax income (loss) from continuing operations
|
|
$
|
(91
|
)
|
|
$
|
(859
|
)
|
|
$
|
127
|
|
|
$
|
(6,276
|
)
|
|
$
|
-
|
|
|
$
|
(7,099
|
)
|
|
|
For the nine months ended March 31, 2018
|
|
(in thousands)
|
|
Durable Medical Equipment
(4)
|
|
|
Investment Management
|
|
|
Real Estate
(5)
|
|
|
General Corporate
|
|
|
Reconciliation to Consolidated Total
|
|
|
Consolidated Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
3,501
|
|
|
$
|
343
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,844
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(449
|
)
|
|
|
(113
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(562
|
)
|
Stock-based compensation
(2)
|
|
|
-
|
|
|
|
(2,889
|
)
|
|
|
-
|
|
|
|
(713
|
)
|
|
|
-
|
|
|
|
(3,602
|
)
|
Other selling, general and administrative
|
|
|
-
|
|
|
|
(3,534
|
)
|
|
|
(21
|
)
|
|
|
(4,032
|
)
|
|
|
-
|
|
|
|
(7,587
|
)
|
Total operating expenses
|
|
|
-
|
|
|
|
(6,872
|
)
|
|
|
(134
|
)
|
|
|
(4,745
|
)
|
|
|
-
|
|
|
|
(11,751
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(174
|
)
|
|
|
(186
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(360
|
)
|
Other income (expense)
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
(747
|
)
|
|
|
-
|
|
|
|
(734
|
)
|
Total other income (expense), net
|
|
|
-
|
|
|
|
(161
|
)
|
|
|
(186
|
)
|
|
|
(747
|
)
|
|
|
-
|
|
|
|
(1,094
|
)
|
Total pre-tax income (loss) from continuing operations
|
|
$
|
-
|
|
|
$
|
(3,532
|
)
|
|
$
|
23
|
|
|
$
|
(5,492
|
)
|
|
$
|
-
|
|
|
$
|
(9,001
|
)
|
(1)
|
The Company’s wholly-owned subsidiary, Great Elm DME Manager, LLC (
DME Manager
), provides advisory services to DME Inc. and receives consulting fee from DME Inc. for those services. DME Manager is considered part of the general corporate segment of the Company. The corresponding expense to DME Inc. and revenue to DME Manager are eliminated in consolidation.
|
(2)
|
Stock-based compensation attributable to the investment management segment is included in investment management expenses in the consolidated statements of operations. Stock-based compensation attributable to the general corporate segment is included in selling, general and administrative expense in the consolidated statements of operations.
|
(3)
|
Transaction costs, which consist of legal and other professional services, are included in selling, general and administrative expense in the consolidated statements of operations.
|
(4)
|
Our durable medical equipment business began in September 2018 and there was no related activity prior to that date.
|
(5)
|
Our real estate business began in March 2018 and there was no related activity prior to that date.
|
42
The following tables illustrate assets by segment (in thousands):
|
|
As of March 31, 2019
|
|
Assets (in thousands)
|
|
Durable Medical Equipment
|
|
|
Investment Management
|
|
|
Real Estate
|
|
|
General Corporate
|
|
|
Total
|
|
Fixed assets, net
|
|
$
|
10,085
|
|
|
$
|
46
|
|
|
$
|
54,717
|
|
|
$
|
-
|
|
|
$
|
64,848
|
|
Identifiable intangible assets, net
|
|
|
7,778
|
|
|
|
3,087
|
|
|
|
5,494
|
|
|
|
-
|
|
|
|
16,359
|
|
Goodwill
|
|
|
45,440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,440
|
|
Other assets
|
|
|
20,776
|
|
|
|
3,590
|
|
|
|
1,222
|
|
|
|
28,111
|
|
|
|
53,699
|
|
Total
|
|
$
|
84,079
|
|
|
$
|
6,723
|
|
|
$
|
61,433
|
|
|
$
|
28,111
|
|
|
$
|
180,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
Assets (in thousands)
|
|
Durable Medical Equipment
|
|
|
Investment Management
|
|
|
Real Estate
|
|
|
General Corporate
|
|
|
Total
|
|
Fixed assets, net
|
|
$
|
-
|
|
|
$
|
41
|
|
|
$
|
55,641
|
|
|
$
|
-
|
|
|
$
|
55,682
|
|
Identifiable intangible assets, net
|
|
|
-
|
|
|
|
3,531
|
|
|
|
5,869
|
|
|
|
-
|
|
|
|
9,400
|
|
Other assets
|
|
|
-
|
|
|
|
5,878
|
|
|
|
937
|
|
|
|
61,690
|
|
|
|
68,505
|
|
Total
|
|
$
|
-
|
|
|
$
|
9,450
|
|
|
$
|
62,447
|
|
|
$
|
61,690
|
|
|
$
|
133,587
|
|
16. 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.
17. Discontinued Operations
In conjunction with the divesture of its patent licensing business on June 30, 2016, the Company was entitled to receive additional proceeds of up to $10.0 million, subject to adjustment for indemnification for claims of breach of representations or warranties. On January 21, 2019, we entered into a mutual release and settlement agreement with the purchaser resulting in the release of any indemnifiable liabilities and an incremental cash receipt of $1.5 million. Prior to the execution of this settlement, the Company had determined that a loss related to final settlement with the purchaser was not realizable or estimable, and therefore had not accrued for any losses; however, the recognition of a portion of proceeds received associated with the former patent licensing business had been deferred pending finalization of all contingencies. The settlement resulted in a $5.1 million and $5.0 million gain in discontinued operations during the three and nine months ended March 31, 2019, respectively, consisting of the extinguishment of related liabilities of $3.6 million and the receipt of cash of $1.5 million from the purchaser, partially offset by legal fees of $0.1 million during the nine months ended March 31, 2019. The net income from discontinued operations includes these gains, offset by a tax provision of $1.2 million for the three and nine months ended March 31, 2019.
43