GEG · Read the filing

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations is a supplement to, and should be read in conjunction with, and is qualified entirely by, our consolidated financial statements (including Notes to the Consolidated Financial Statements) and the other consolidated financial information appearing elsewhere in this report. Some of the information in this discussion and analysis includes forward-looking statements that involve risk and uncertainties. Actual results and timing of events could differ from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

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

For additional information see “Item 1. Business.”

COVID-19

The Company’s revenues continued to be adversely impacted by the COVID-19 pandemic. Beginning in March 2020, the Company experienced a decrease in assets under management in our managed portfolios within the investment management business and observed higher patient cancellation rates for attended sleep studies as well as softer patient referral pipelines for new medical device set-ups within our durable medical equipment business. The impact of COVID-19 continues to evolve and its duration and ultimate disruption to the Company’s customers and to its operations cannot be estimated at this time. Should the disruption continue for an extended period of time, it could have a more severe adverse effect on our business and operations.

In addition, COVID-19 may impact our ability to act on new acquisitions or other business opportunities.

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

At HC LLC we invested in virtual patient set-ups which allow our respiratory therapists to interact with patients by video to maintain social distance. Certain other employees whose responsibilities have been impacted by social distancing have been temporarily redeployed within the organization.

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

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP). The preparation of these financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by our management for changes in facts and circumstances, and material changes in these estimates could occur in the future.

Business Combinations, Acquired Intangible Assets and Goodwill

Business combinations are accounted for at fair value. 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 and liabilities acquired. Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized. Instead, goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.

The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors, and long-term growth expectations. The Company utilizes third-party specialists to assist management with the identification and valuation of intangible assets using customary valuation procedures and techniques.

We perform our annual impairment test of goodwill on the first day of the fiscal fourth quarter. The Company tests long-lived assets, including intangible assets, for impairment if conditions exist that indicate the carrying value may not be recoverable.

All of the Company’s goodwill was acquired in conjunction with the acquisitions of the durable medical equipment businesses and has been recorded within our durable medical equipment reporting unit. Based on our annual impairment test as of April 1, 2021 the fair value of the durable medical equipment reporting unit exceeded the carrying value by 73.0% and no impairment occurred. The fair value of this reporting unit was derived using a combination of present value of estimated cash flows and the valuations and prices of comparable businesses. The discount rate used in this analysis was 15.5%.

Accounts Receivable

Substantially all of the accounts receivable balance relates to the durable medical equipment business. Accounts receivable are customer obligations due under normal sales and rental terms and represent the amount estimated to be collected from the patient customers and, if applicable, the third-party private insurance provider or government program (collectively, Payors), based on the contractual agreements. The Company does not require collateral in connection with its customer transactions and aside from verifying insurance coverage, does not perform credit checks on patient customers. Revenue and accounts receivable have been constrained to the extent that billed amounts exceed the amounts estimated to be collected. The constrained transaction price relates primarily to expected billing adjustments with the Payors and patient customers. Management’s evaluation of variable consideration takes into account such factors as past experience, information about specific receivables, Payors and patient customers.

The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. Changes in constraints on variable consideration are recorded as a component of net revenues. To the extent historical experience is not indicative of future performance, actual collections experience could differ significantly from management’s judgments and expectations, resulting in either increases or decreases to future revenues, as applicable.

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

Durable Medical Equipment Revenue

Durable medical equipment revenue from a customer consists of any combination of the sale and rental of durable medical equipment and/or the provision of sleep study services. For durable medical equipment sales and services, the Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. For revenue associated with durable medical equipment rentals, the Company recognizes revenue in accordance with ASC Topic 842, Leases.

The Company sells durable medical equipment, replacement parts and supplies to customers and recognizes revenue at the point control is transferred through delivery to the customer. Each piece of equipment, part or supply is distinct and separately priced thus they each represent a single performance obligation. The revenue is allocated amongst the performance obligations based upon the relative standalone selling price method, however, items are typically all delivered or supplied together. The customer and, if applicable, the Payors are generally charged at the time that the product is sold, although separate layers of insurance coverage may need to be invoiced before final billings may occur.

The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met.

The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis. The customer has the right to cancel the lease at any time during the rental period and payments are generally billed in advance on a month-to-month basis.

Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility. For durable medical equipment sales and services revenue, the Company includes in the transaction price only the amount that the Company expects to be entitled. Durable medical equipment rental revenue is recognized for amounts where collection from Payors and patients are reasonably assured. As such, revenue recognized upon satisfaction of the Company’s performance obligations consist of substantially all of the Payor billings at contractual rates as well as estimates of patient co-payments that will ultimately be collected.

Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. To the extent historical experience is not indicative of future performance, actual collections experience could differ significantly from management’s judgments and expectations, resulting in either increases or decreases to future durable medical equipment sales and services revenues or durable medical equipment rental income, as applicable.

Investment Management Revenue

Because of the uncertainty of when incentive fees will be collected due to market conditions and investment performance, incentive fees are fully constrained and not recorded until received and the probability of significant reversal of the fees is eliminated in accordance with the respective investment management agreements. As of June 30, 2021, the Company had $9.7 million in cumulative earned but constrained incentive fee revenue. To the extent such constrained incentive fees are collected in the future, they could result in significant increases to future investment management revenue.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Valuation allowances are established when necessary in order to reduce deferred tax assets to the amounts expected to be recovered.

The Company has established a full valuation allowance for its deferred tax assets that are not recoverable from taxable temporary differences due to historical net operating losses. To the extent that the Company generates taxable income in the future, the reversal of valuation allowances could generate significant tax benefits to future operations. As of June 30, 2021, the Company has a valuation allowance of $231.8 million.

The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations in several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company records estimated reserves for exposures associated with positions that it takes on its income tax returns that do not meet the more likely than not standards.

Results of Operations

The following discussion is reflective of our two business operating segments: durable medical equipment and investment management. General corporate represents unallocated costs and activity to arrive at consolidated operations. Activity not allocated to the segments include, but are not limited to, certain investment and financing activities, professional fees, costs associated with being a public company, acquisition costs and costs associated with executive and corporate management departments, including compensation, benefits, rent and insurance. During the fiscal year ended June 30, 2020 we sold our real-estate business. See “Discontinued Operations” below for more information.

The following table provides the results of our consolidated operations for the years ended June 30, 2021 and 2020:

For the years ended June 30,

Revenue:

Operating costs and expenses:

Other selling, general and administrative (38,376 ) 11 % (34,490 )

Depreciation and amortization (2,383 ) (5 )% (2,515 )

Other income (expense):

Other income (expense) 1,842 NM% (6,555 )

Total pre-tax loss from continuing operations $ (7,515 ) $ (13,302 )

NM - not meaningful

Revenues

Revenues for the year ended June 30, 2021 included $57.6 million from the durable medical equipment business and $3.2 million from the investment management business, while revenues for the year ended June 30, 2020 included $55.7 million from the durable medical equipment business and $3.3 million from the investment management business. The increase in total revenue for the year ended June 30, 2021 as compared to the year ended June 30, 2020 is primarily attributable to contributions from the acquisition of Advanced Medical DME, LLC and PM Sleep Lab, LLC (collectively, AMPM) in March 2021 and organic growth in resupply sales within the durable medical equipment business. These increases were partially offset by decreases in durable medical equipment rentals due to the continued suppressed referral pipeline for new equipment set-ups and increased revenue reserve constraints, as well as decreases in management fees earned from our investment management business. Investment management revenues decreased $0.1 million related to lower management fees earned on managed portfolios during the year.

Operating costs and expenses

The increase in operating expenses for the year ended June 30, 2021 as compared to the year ended June 30, 2020 is primarily attributable to increases at the durable medical equipment business due to AMPM contributions and increased COVID-19-related costs, as well as an increase in compensation at the investment management segment.

Other income (expense)

Interest expense increased for the year ended June 30, 2021 as compared to the year ended June 30, 2020 due to issuance of preferred stock in Forest Investments, Inc. (Forest), and HC LLC in December 2020 and the Convertible Notes in February 2020.

Other income (expense) typically consists of dividend income and net unrealized gain (loss) on investments. The year over year net increase is primarily attributable to the net realized and unrealized gain on our investment in GECC and private funds which is discussed under “—Investment Management” below. In addition, the Company recognized approximately $1.9 million in losses on extinguishment of debt during the year ended June 30, 2021. There was no corresponding activity in the prior year presented in the table above.

Durable Medical Equipment

The key metrics of our durable medical equipment business include:

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

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

For the years ended June 30,

Revenue:

Operating costs and expenses:

Transaction costs (299 ) NM% -

Other selling, general and administrative (28,969 ) 11 % (26,080 )

Depreciation and amortization (1,909 ) 2 % (1,878 )

Other income (expense):

Other income (expense) (1,174 ) NM% 5

Total other expense, net (5,124 ) (3,650 )

Total pre-tax loss from continuing operations $ (2,489 ) $ (106 )

NM - not meaningful

Durable Medical Equipment Revenue

In March 2021, the Company acquired AMPM, expanding our geographical footprint throughout Kansas and Missouri. From acquisition thru June 30, 2021, AMPM contributed approximately $1.5 million in revenues to our durable medical equipment business.

Durable medical equipment revenues include revenue from the sale of medical equipment, sleep study services and medical equipment rentals. For the year ended June 30, 2021, revenues from the sale of medical equipment and sleep study services were $32.3 million and $5.1 million, respectively, compared to $28.9 million and $5.3 million, respectively during the year ended June 30, 2020.

Revenue from medical equipment rentals was $20.2 million for the year ended June 30, 2021 as compared to $21.5 million for the year ended June 30, 2020. The decrease is primarily attributable to the continued suppressed referral pipeline for new equipment set ups, partially offset by AMPM contributions.

Due to the COVID-19 pandemic, we have seen continued softness in our sleep study services due primarily to potential patients putting off perceived non-essential health care services.

In addition, a portion of our equipment sales and rentals are dependent on the availability and accessibility of primary physicians to patients. If patients are unable to access their physicians or otherwise delay seeking medical attention for their conditions, our referral pipeline for new patient set-ups and related sales and rental revenues are adversely impacted.

Durable Medical Equipment Costs and Expenses

Cost of goods sold includes inventory costs for medical equipment sold and direct costs associated with running sleep study services, including staff compensation to perform the studies and the purchase of supplies used in the studies. Cost of rentals includes depreciation on medical equipment held for lease and costs related to maintenance expenses. The increases in these costs for the year ended June 30, 2021 as compared to the year ended June 30, 2020 are primarily due to the increases in the related revenues and sales volumes, along with higher sales on lower margin products including resupply revenue versus higher margin services such as sleep studies.

General and administrative expenses consist of employee-related, facility-related, freight and shipping, IT and other costs. For the years ended June 30, 2021 and 2020, these amounts are net of government stimulus received under the CARES Act of $4.6 million and $5.1 million, respectively. Excluding such stimulus, employee-related costs were $22.5 million and $20.7 million, respectively. The increase in employee related costs is primarily due to additional payroll-related costs relating to acquired AMPM employees and the conversion of certain consultants into full-time employees. Facility-related expenses were $3.4 million and $3.1 million, respectively, with increases mainly due to expansion through acquisition and the build out of existing locations, along with increased costs related to COVID-19 including social distancing modifications and enhanced cleaning protocols. Freight and shipping costs were $1.7 million and $1.4 million, respectively, with increases primarily related to remote patient set-ups that were previously performed in person prior to the pandemic. Information technology costs were $2.2 million and $2.0 million, respectively, with increases due to the AMPM acquisition. Other costs were $3.7 million and $4.0 million, primarily consisting of professional fees, which decreased as certain consultants were converted into full-time employees, as noted above.

Transaction costs increased for the year ended June 30, 2021 as compared to the prior period as they primarily relate to one-time expenses incurred in the acquisition of AMPM in the current year, whereas no acquisitions were noted in the prior period.

Durable Medical Equipment Other Income (Expense)

In addition to the operating costs and expenses, we recognized interest expense of $4.0 million and 3.7 million for the years ended June 30, 2021 and 2020, respectively. The increase is primarily related to the issuance of $44 million in Series A-1 Preferred Stock and Series A-2 Preferred Stock in December 2020, a refinancing that retired the previously outstanding term loan of $26 million.

Other income (expense) primarily consists of a debt extinguishment charge of $1.9 million in the current year related to the paydown of the term loan in December 2020. This charge is partially offset by a $0.7 million gain recorded to mark an embedded derivative on the Series A-2 Preferred Stock to fair value as of June 30, 2021.

Investment Management

The key metrics of our investment management business include:

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

For the years ended June 30,

Revenue:

Operating costs and expenses:

Stock-based compensation (757 ) NM% 34

Consulting agreement - (100 )% (283 )

Other general and administrative (2,810 ) 51 % (1,855 )

Depreciation and amortization (473 ) (26 )% (636 )

Total operating expenses (4,040 ) (2,740 )

Operating income (loss) (830 ) 592

Other income (expense):

Other income (expense) 3,654 NM% (6,617 )

Total other income (expense), net 3,553 (6,774 )

Total pre-tax income (loss) from continuing operations $ 2,723 $ (6,182 )

NM - not meaningful

Investment Management Revenue

Investment management revenues include management fees and administration fees related to services provided to certain managed investment vehicles. For the years ended June 30, 2021 and 2020, we recognized $2.7 million and $2.8 million, respectively, of management fee revenue and $0.5 million and $0.5 million, respectively, of administration fee revenue. The decrease in management fee revenue for the year ended June 30, 2021 as compared to the year ended June 30, 2020 is attributable to decreases in the average assets on which such fees are calculated. Administration fees for the year ended June 30, 2021 were consistent with the administration fees for the year ended June 30, 2020.

Investment Management Costs and Expenses

Stock-based compensation costs increased for the year ended June 30, 2021 as compared to the year ended June 30, 2020 as the prior period benefit includes changes in estimates related to performance-based awards.

GECM had a consulting agreement with a third party to provide services in exchange for 26% of the fees earned from the management of GECC, excluding incentive fees. The consulting agreement expired in November 2019, as such no such consulting fees were incurred for year ended June 30, 2021.

Other general and administrative costs consist primarily of employee-related, facility-related, professional feesand other overhead costs, excluding stock-based compensation. The increase in general and administrative costs for the year ended June 30, 2021 as compared to the year ended June 30, 2020 is primarily attributable to the increases in employee-related costs and professional fees related to investment management growth initiatives.

Investment Management Other Income (Expense)

Other income and expense primarily consisted of dividend income and unrealized gains or losses on the Company’s managed investments in GECC and GESOF. Dividend income for the years ended June 30, 2021 and 2020 was $3.0 million and $2.1 million, respectively. We recognized unrealized gains of $0.7 million and unrealized losses of $8.7 million, respectively, for the years ended June 30, 2021 and 2020. We mark-to-market our investment in GECC and underlying investments of GESOF by reference to the closing price of related investments on Nasdaq or other exchanges, as applicable, as of each period end.

General Corporate

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

For the years ended June 30,

Revenue:

Operating costs and expenses:

Stock-based compensation (998 ) 71 % (582 )

Other general and administrative (4,504 ) (10 )% (5,020 )

Depreciation and amortization (1 ) - % (1 )

Total operating expenses (6,121 ) (6,466 )

Other income (expense):

Interest expense (3,923 ) NM% (764 )

Other income (expense) 1,716 NM% 57

Total other expense, net (2,207 ) (707 )

Total pre-tax loss from continuing operations $ (7,749 ) $ (7,014 )

General Corporate Revenue

For the years ended June 30, 2021 and 2020, all revenue was derived from fees earned by Great Elm DME Manager, LLC (DME Manager), a subsidiary in our general corporate segment, which provides consulting services to HC LLC, a subsidiary in our durable medical equipment segment. In addition to this revenue, the year ended June 30, 2021, revenue includes $0.2 million in fees earned by DME Manager relating to consulting services provided to Forest.

General Corporate Costs and Expenses

Our general and administrative costs primarily consisted of professional fees, employee-related and facility-related costs for our finance, legal and other administrative functions as well as professional fees and payroll costs in connection with our diligence efforts towards identifying asset and business acquisition opportunities. Excluding the non-recurring benefit in the prior year of $1.1 million related to the change in fair value of contingent consideration, other general and administrative expenses at Corporate decreased $1.7 million or 27% year over year as management focused on vendor management and controlling overhead costs. The decrease in general and administrative fees is largely derived from the $1.0 million decrease in external audit fees attributable to our change in auditors in the prior year, $0.6 million decrease in employee-related costs as allocable employees focused their attention on our operating segments, and a $0.3 million reduction in board costs as certain directors elected to take their cash compensation in the form of stock awards (this results in a corresponding increase to stock-based compensation). This increase is partially offset by $0.2 million in Forest management fees.

General Corporate Other Income (Expense)

Interest expense consists of interest on the Convertible Notes issued in March 2020, as well as on Forest Preferred Stock, which was issued in December 2020. Interest expenses increased for the year ended June 30, 2021 as compared to the year ended June 30, 2020 as it includes a full year of interest on the Convertible Notes and six months of interest on the preferred stock, whereas the prior year includes only four months of interest on the Convertible Notes.

Other income (expense) during the current year is comprised of intercompany interest income of $2.4 million related to Forest's investments in HC LLC preferred stock. This amount is partially offset by a $0.7 million charge related to changes in the valuation of the embedded derivative. This income has corresponding charges in the durable medical equipment business and such impacts are eliminated in consolidation. Since the preferred stock was issued in December 2020, there is no corresponding activity in the prior year.

Income Taxes

We do not expect that we will owe any federal taxes for the year ended June 30, 2021 or 2020, however, we are required to provide intra period taxes allocated between continuing operations and discontinued operations. During 2021, the Company recognized an income tax benefit with respect to discontinued operations of $0.1 million related to intra period allocations. No intraperiod allocations were made in 2020. State and local taxes were approximately $1.4 and $0.1 million for the year ended June 30, 2021 and 2020, respectively. State tax provisions during the year ended June 30, 2021 are primarily attributable to discrete taxable entity re-organization transactions at HC LLC and Great Elm Capital GP, LLC.

Summary of Discontinued Operations

On June 23, 2021, the Company’s majority-owned indirect subsidiary Great Elm FM Acquisition, Inc., entered into an agreement with Monomoy Properties Fort Myers, LLC (Monomoy FM) to sell the Company’s real estate business to Monomoy FM for $4.6 million in cash. The real estate business consists of majority-interests in two Class A office buildings totaling 257,000 square feet situated on 17 acres of land in Fort Myers, Florida. The Company acquired the real estate business in March 2018 for $2.7 million. After transaction costs, the gain on the sale was $0.3 million.

The sale of the real estate business, which has historically been disclosed as its own reportable segment, represents a strategic shift away from the direct ownership and operation of real estate properties. Accordingly, our historical financial information has been recast to present the activities of the real estate business within discontinued operations, and the assets and liabilities of the real estate business as assets and liabilities of discontinued operations.

For the years ended June 30,

Discontinued operations:

Real estate expenses (505 ) (544 )

Depreciation and amortization (1,689 ) (1,722 )

Operating income from discontinued operations 2,811 2,838

Gain on sale of real estate business 263 -

Pretax income from discontinued operations 538 219

Income tax benefit 111 -

Net income from discontinued operations $ 649 $ 219

Operations of the discontinued real estate business were relatively flat year over year. Upon sale of the business on June 23, 2021, we recognized a gain on sale of $0.3 million. In addition, we also recorded a tax benefit of $0.1 million related to intraperiod tax allocations to the discontinued operations.

Liquidity and Capital Resources

The following table presents selected financial information and statistics:

As of June 30,

For the years ended June 30,

Cash provided by (used in) operating activities $ (18,976 ) $ 13,245

Cash provided by (used in) investing activities (15,482 ) (6,632 )

Cash provided by (used in) financing activities 18,340 21,776

Net increase (decrease) in cash and cash equivalents $ (16,118 ) $ 28,389

Working Capital and Cash Flows

As of June 30, 2021, we have cash of $24.4 million and investments with a fair value of $24.0 million.

We intend to make acquisitions that will likely result in our investment of all of our liquid financial resources, the issuance of equity securities and the incurrence of indebtedness. If we are unsuccessful at raising additional capital resources, through either debt or equity, it is unlikely we will be able execute our strategic growth plan. See “Item 1A. Risk Factors.”

Cash Provided by or Used in Operating Activities. Cash flows used in operating activities totaled $19.0 million and cash flows provided by operating activities totaled $13.2 million for the years ended June 30, 2021 and 2020, respectively. For the year ended June 30, 2021, net cash used in operating activities consisted primarily of the net loss of $8.7 million and purchase of investments totaling $31.4 million, partially offset by $8.7 million in non- cash depreciation and amortization, $5.8 million in sales of investments by our consolidated funds, $2.5 million in non-cash interest and amortization and loss on extinguishment of debt of $1.9 million. For the year ended June 30, 2020, net cash provided by operating activities consisted primarily of the net loss of $13.1 million offset by $4.4 million in CMS advanced payments included in deferred revenue and non-cash activity, including $10.8 million in depreciation and amortization and $8.7 million in unrealized loss on our investment in GECC.

Cash Used in Investing Activities. Cash flows used in investing activities totaled $15.5 million and $6.6 million for the years ended June 30, 2021, and 2020, respectively. For the year ended June 30, 2021, net cash used in investing activities primarily consists of $6.7 million in purchases of equipment held for rental, $8.8 million in participation in related party rights offering and $4.7 million purchases of investments, partially offset by $4.4 million in net proceeds received from the sale of the real estate business.For the year ended June 30, 2020, net cash used in investing activities primarily consists of $8.1 million in purchases of equipment held for rental which was partially offset by $1.8 million in proceeds from the sale of equipment held for rental.

Cash Provided by Financing Activities. Cash flows provided by financing activities totaled $18.3 million and $21.8 million for the years ended June 30, 2021 and 2020, respectively. For the year ended June 30, 2021, net cash inflows primarily consisted of $37.7 million in gross proceeds from the JPM Transaction, $11.2 million in margin borrowing due to broker from investment purchases in the consolidated funds, capital contributions from non-controlling interests in the consolidated funds of $4.8 million and $3.6 million in proceeds from new equipment financing debt. Such inflows were partially offset by principal payments of $33.4 million on our debt, $1.6 million in debt extinguishment costs and capitalized issuance costs of $1.3 million in connection with the JPM Transaction. For the year ended June 30, 2020, cash inflows of $30.0 million were provided by the issuance of Convertible Notes, partially offset by net principal payments of $5.3 million on our long-term related party notes payable, revolving line of credit and equipment financing and payment of debt issuance costs.

Borrowings

As of June 30, 2021 the Company had $34.3 million face value in Convertible Notes outstanding. The Convertible Notes are held by a consortium of investors, including related parties. The Convertible Notes accrue interest at 5.0% per annum, payable semiannually in arrears on June 30 and December 31, in cash or in-kind at the option of the Company.

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

As of June 30, 2021, JPM held $35.0 million face value in shares of Forest Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027. The redemption events include the occurrence of an ownership change that triggers an IRC § 382 limitation which reduces Forest net operating loss carryforwards to less than $300 million. The shares are redeemable at any time at the option of Company at a redemption price at face value plus the 0-3% premium then in place. The shares rank senior and have preference to the common shares of Forest. The shares are non-voting, do not participate in the earnings of Forest and contain standard protective rights.

As of June 30, 2021, Corbel and VHG, both related parties, held a combined $2.0 million in face value of shares of HC LLC Series A-1 Preferred Stock. The shares provide for a 9% annual dividend, which is payable quarterly. The shares are mandatorily redeemable by the Company at their face value of $1,000 per share on the earlier of certain redemption events or December 29, 2027. The redemption events include a bankruptcy, change in control or sale of the durable medical equipment business. The shares are redeemable at any time at the option of the Company at a redemption price equal to face value. The shares rank senior and have preference to the common shares of HC LLC. The shares are non-voting, do not participate in the earnings of HC LLC and contain standard protective rights.

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

As of June 30, 2021, we had an undrawn credit facility with Pacific Mercantile Bank that accrues interest at the prime rate plus 0.4% (at June 30, 2021, the effective rate was 3.7%) through maturity on November 29, 2022 (the DME Revolver). The DME Revolver allows for borrowings up to $10 million. The DME Revolver requires monthly interest payments. The DME Revolver is secured by all of the assets of the durable medical equipment business and the Company is required to meet certain financial covenants.

The DME Revolver includes covenants that restrict HC LLC business operations to its current business, limit additional indebtedness, liens, asset dispositions and investments, require compliance and maintenance of licenses and government approvals and other customary conditions. Events of default include the failure to pay amounts when due, bankruptcy, or violation of covenants, including a change in control of HC LLC. HC LLC must also comply with a fixed-charge coverage and leverage ratio financial covenants, which are based in part on the HC LLC EBITDA levels. The Company was in compliance with all material covenants and restrictions at June 30, 2021.

HC LLC’s operating subsidiaries also utilize equipment financing debt to fund certain inventory and equipment purchases from suppliers. These equipment financing debt agreements are entered into with 3rd party banks and are generally payable in equal installments over terms of one to three years, depending on the nature of the underlying purchases being financed. The debt is secured by the inventory and equipment, as applicable, of the operating subsidiaries entering into the agreements, and the long-term agreements have implicit interest rates between 7 – 8%. As of June 30, 2021, the Company had $2.0 million in equipment financing debt outstanding.

On March 27, 2020, the President of the United States passed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Section 1102 of the CARES Act, the Paycheck Protection Program Loan (PPP Loan) provided additional funding for small businesses, as defined by the Small Business Act, to keep workers employed during through the COVID-19 crisis. In April 2020, our 80.1% owned subsidiary Great Elm DME, Inc. applied for and received $3.6 million in PPP Loans. Proceeds can only be used for specified covered purposes including payroll, rent and utilities in accordance with the CARES Act. Between funding and June 30, 2020, the Company spent these proceeds on covered purposes and has recognized the proceeds as a reduction to operating expenses. During the year ended June 30, 2021, the Company submitted a forgiveness application to the lender seeking full forgiveness of the PPP Loan, which was approved by the SBA.

Restrictions on Subsidiary Dividends

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

Off-Balance Sheet Obligations

As of June 30, 2021, we did not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in our consolidated financial statements.

New Accounting Pronouncements

See Note 2 – Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 8 by reference.

Per Rule 3-09 of Regulation S-X, the audited financial statements of GECC for the years ended December 31, 2020 and 2019 included in GECC’s annual report on Form 10-K (File No. 814-01211), filed with the SEC on March 16, 2021 are incorporated herein by reference. We include the financial statements of GECC because our investment in GECC met the test of significance under Rule 3-09 in Regulation S-X. The management of GECC is responsible for the form and content of GECC’s financial statements. Certain officers of GECC are also officers of GEG. Mr. Reed is our Chief Executive Officer as well as the Chief Executive Officer of GECC and Mr. Kleinman is our President and Chief Operating Officer as well as the Chief Compliance Officer of GECC. GECM serves as the investment advisor to GECC.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective as of June 30, 2021.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for preparation of the accompanying consolidated financial statements in accordance with US GAAP.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2021 as required by the Exchange Act. In making this assessment, we used the criteria set forth in the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework, management concluded that Great Elm Group, Inc.’s internal control over financial reporting was effective as of June 30, 2021.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Items 401, 405, 406, and 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K will be contained in our definitive proxy statement (our Proxy Statement) and is hereby incorporated by reference thereto.

Item 11. Executive Compensation.

The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 201(d) and Item 403 of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 404 and Item 407(a) of Regulation S-K will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

Item 14. Principal Accountant Fees and Services.

The information required by Item 9(e) of Schedule 14A will be contained in our Proxy Statement and is hereby incorporated by reference thereto.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

Financial Statements

The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated in this Item 15 by reference.

Financial Statement Schedules

Schedules are omitted because they are not required or are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

Exhibits

The exhibit index attached hereto is incorporated by reference. We will furnish any exhibit upon request made to our Corporate Secretary, 800 South Street, Suite 230, Waltham, MA 02453. We charge $0.50 per page to cover expenses of copying and mailing.

EXHIBIT INDEX

We will furnish any exhibit upon request made to our Corporate Secretary, 800 South Street, Suite 230, Waltham, MA 02453. We charge $0.50 per page to cover expenses of copying and mailing.

Unless otherwise indicated, all references are to filings by Great Elm Group, Inc. (the Registrant) with the Securities and Exchange Commission under File No. 001-39832

Exhibit No. Description

21.1 Subsidiaries of the Registrant.

Exhibit No. Description

*Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. GEG hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission.

+Indicates a management contract or compensatory plan or arrangement.

Item 16. Form 10-K Summary.

We have elected not to provide a Form 10-K summary.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of September 20, 2021.

GREAT ELM GROUP, INC.

By: /s/ Peter A. Reed

Name: Peter A. Reed

Title: Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of September 20, 2021.

Signature Title

/s/ Peter A. Reed Chief Executive Officer and Director

Peter A. Reed (Principal Executive Officer)

/s/ Brent J. Pearson Chief Financial Officer & Chief Accounting Officer

Brent J. Pearson (Principal Financial and Accounting Officer)

/s/ Matthew A. Drapkin Director

Matthew A. Drapkin

/s/ Thomas S. Harbin III Director

Thomas S. Harbin III

/s/ James H. Hugar Director

James H. Hugar

/s/ James P. Parmelee Director

James P. Parmelee

/s/ Jason W. Reese Director

Jason W. Reese

/s/ Eric J. Scheyer Director

Eric J. Scheyer

/s/ Jeffrey S. Serota Director

Jeffrey S. Serota

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets at June 30, 2021 and 2020 F-4

Notes to the Consolidated Financial Statements F-9

F-1

Report of Independent Registered PUBLIC Accounting Firm

Board of Directors and Shareholders

Great Elm Group, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Great Elm Group, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and contingently redeemable non-controlling interest, and cash flows for each of the two years in the period ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Durable Medical Equipment Revenue Recognition – Variable Consideration

As described further in notes 2 and 3 to the financial statements, and disclosed in the consolidated statement of operations, the Company recorded $60.9 million of total revenues for the year ended June 30, 2021, of which $57.6 million related to the Durable Medical Equipment operating segment.

The Company’s revenue is recorded based on the amount that the Company expects to receive in exchange for the goods or services provided, which consists of the transaction price net of estimates for variable consideration. Actual amounts of consideration ultimately received may differ from the Company’s initial estimates. We identified the estimation of the variable consideration within the Durable Medical Equipment revenue streams as a critical audit matter.

F-2

The principal considerations for our determination that variable consideration is a critical audit matter are (i) the significant judgment exercised by the Company in estimating variable consideration and (ii) the volume and variability of information necessary to evaluate of the initial amounts recorded that are subject to the Company’s estimate of variable consideration.

Our audit procedures related to variable consideration included the following, among others:

We have served as the Company’s auditor since 2020.

/s/ Grant Thornton LLP

Boston, Massachusetts

September 20, 2021

F-3

GREAT ELM GROUP, INC.

CONSOLIDATED BALANCE SHEETS

Dollar amounts in thousands, except per share amounts

Current assets:

Prepaid and other current assets 3,791 689

Assets of consolidated funds:

Prepaid expenses 578 -

Current assets of discontinued operations - 914

Property and equipment, net 981 1,410

Equipment held for rental, net 7,391 7,483

Identifiable intangible assets, net 8,928 10,258

Noncurrent assets of discontinued operations - 59,316

LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY

Current liabilities:

Accrued expenses and other liabilities 6,955 3,062

Current portion of lease liabilities 1,920 1,617

Current portion of long term debt - 3,895

Current portion of related party notes payable - 5,207

Current portion of equipment financing debt 1,974 2,034

Liabilities of consolidated funds - accrued expenses and other 12,197 -

Current liabilities of discontinued operations - 2,829

Lease liabilities, net of current portion 3,596 4,060

Related party notes payable, net of current portion - 22,696

Equipment financing debt, net of current portion 67 196

Noncurrent liabilities of discontinued operations - 52,781

Commitments and Contingencies (Note 20)

Contingently redeemable non-controlling interest 2,639 3,890

Stockholders' equity

Preferred stock, $0.001 par value; 5,000,000 authorized and zero outstanding - -

Total Great Elm Group, Inc. stockholders' equity 54,360 60,794

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

F-4

GREAT ELM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Dollar amounts in thousands, except per share data

For the years ended June 30,

Revenues:

Durable medical equipment sales and services revenue $ 37,460 $ 34,213

Durable medical equipment rental income 20,183 21,449

Investment management revenues 3,210 3,332

Operating costs and expenses:

Cost of durable medical equipment sold and services 16,881 15,055

Cost of durable medical equipment rentals(1) 6,950 9,105

Durable medical equipment other operating expenses(2) 28,917 25,921

Investment management expenses 3,492 2,104

Depreciation and amortization 2,383 2,515

Selling, general and administrative(3) 5,892 6,465

Expenses of consolidated funds 75 -

Dividends and interest income 2,963 2,124

Net realized/ unrealized gain (loss) on investments 155 (8,684 )

Net realized/ unrealized gain on investments of consolidated funds 545 -

Extinguishment of debt (1,866 ) -

Other income, net 45 5

Loss from continuing operations, before income taxes (7,515 ) (13,302 )

Income tax expense (1,813 ) (44 )

Loss from continuing operations (9,328 ) (13,346 )

Discontinued operations:

Income from discontinued operations, net of tax 649 219

Net loss attributable to Great Elm Group $ (8,084 ) $ (12,975 )

Basic income (loss) per share

Continuing operations $ (0.34 ) $ (0.52 )

Discontinued operations 0.03 0.01

Diluted income (loss) per share from:

Continuing operations $ (0.34 ) $ (0.52 )

Discontinued operations 0.03 0.01

Weighted average shares outstanding

(1) Includes depreciation expense of: 6,286 8,267

(3) Net of CARES Act Stimulus of: 168 -

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

F-5

GREAT ELM GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND CONTINGENTLY REDEEMABLE NON-CONTROLLING INTEREST

Shares Amount Capital Deficit Equity Interest Equity Interest

Stock-based compensation - - 548 - 548 - 548 -

Repurchase of interests in subsidiary - - (707 ) - (707 ) 788 81 -

Issuance of Forest common stock - - - - - 2,700 2,700 -

Issuance of interests in Consolidated Fund - - - - - 4,325 4,325 -

Sale of real estate business - - - - - (830 ) (830 )

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

F-6

GREAT ELM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollar amounts in thousands

For the years ended June 30,

Cash flows from operating activities:

Net income from discontinued operations (649 ) (219 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Sales of investments by consolidated funds 5,842 -

Purchases of investments by consolidated funds (31,365 ) -

Stock dividends received from GECC (1,868 ) (279 )

Unrealized (gain) loss on investments (292 ) 8,684

Realized loss on investments 137 -

Unrealized (gain) on investments of consolidated funds (254 ) -

Realized (gain) on investments of consolidated funds (291 ) -

Non-cash interest and amortization of capitalized issuance costs 2,522 881

Loss on extinguishment of debt 1,866 -

Deferred tax expense 684 36

Gain on sale of equipment held for rental (452 ) (932 )

Change in fair value of contingent consideration (126 ) (1,135 )

Changes in operating assets and liabilities:

Related party receivable (606 ) 362

Prepaid assets, deposits, and other assets (3,223 ) (190 )

Related party payable - (805 )

Accounts payable, accrued liabilities and other liabilities 3,931 1,022

Net cash provided by operating activities - discontinued operations 1,931 2,146

Net cash provided by (used in) operating activities (18,976 ) 13,245

Cash flows from investing activities:

Proceeds from settlement with seller - 355

Acquisition of business, net of cash acquired (748 ) -

Purchases of investments (4,675 ) -

Sales of investments 35 -

Participation in related party rights offering (8,751 ) -

Purchases of equipment held for rental (6,686 ) (8,110 )

Proceeds from sale of equipment held for rental 1,273 1,800

Purchases of property and equipment (287 ) (737 )

Proceeds from sale of property and equipment - 60

Net cash used in investing activities - continuing operations (19,839 ) (6,632 )

Net cash provided by investing activities - discontinued operations 4,357 -

Net cash used in investing activities (15,482 ) (6,632 )

F-7

GREAT ELM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Dollar amounts in thousands

For the years ended June 30,

Cash flows from financing activities:

Proceeds on revolving line of credit - 2,550

Principal payments on revolving line of credit (3,900 ) (6,050 )

Principal payments on note payable to seller (25,105 ) (2,552 )

Principal payments on equipment financing (4,378 ) (2,857 )

Proceeds from equipment financing 3,642 3,612

Capitalized issuance costs (1,250 ) (768 )

Due to broker of consolidated funds 11,249 -

Payments made to non-controlling interest holders (132 ) -

Proceeds from convertible notes - 30,000

Payments of debt extinguishment costs (1,627 ) -

Dividends paid to non-controlling interest holders of DME Inc. (368 ) -

Issuance of Forest preferred stock 35,010 -

Proceeds from issuance of Forest common stock, gross 2,700 -

Net cash provided by financing activities - continuing operations 20,666 23,935

Net cash provided by financing activities 18,340 21,776

Net increase (decrease) in cash and cash equivalents (16,118 ) 28,389

Cash and cash equivalents at beginning of year 40,500 12,111

Cash and cash equivalents at end of year $ 24,382 $ 40,500

Non-cash investing and financing activities

Deferred financing costs incurred but not yet paid $ - $ 397

Contingent consideration 397 -

Repurchase of GP Corp. Note 3,072 -

Issuance of convertible notes 2,250 -

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

F-8

GREAT ELM GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

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

Investment Management

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

On November 3, 2016, Full Circle Capital Corporation merged with and into GECC and GECM hired the employees of MAST Capital Management, LLC (MAST Capital), a Delaware limited liability company, to manage the assets of GECC. Through the Company’s majority-owned subsidiary, GECC GP Corp. (GP Corp.), the Company acquired assets and assumed related liabilities associated with the on-going operations of GECM. A portion of the non-controlling interest of GP Corp. was owned by MAST Capital, and its affiliates and officers. In March 2021, the Company purchased all interests in GP Corp. held by MAST Capital and its affiliates.

On June 29, 2021, GP Corp assigned the rights to the Profit Sharing Agreement (as defined in Note 7 – Related Party Transactions) with GECM, their intercompany obligation under the GP Corp. Note (as defined in Note 13 – Borrowings) and other assets and liabilities to their wholly-owned subsidiary Great Elm Capital GP, LLC (GEC GP). Subsequent to the assignment, the Company exchanged their 98.2% interests in GP Corp. for an identical 98.2% direct interest in GP Corp.’s wholly-owned subsidiary GEC GP. Following the consummation of the taxable reorganization, the Company no longer has an interest in GP Corp.

Durable Medical Equipment

On September 7, 2018, the Company, through its majority-owned subsidiary, Great Elm DME Holdings, Inc. (DME Holdings), acquired an 80.1% equity interest in Great Elm DME, Inc. (DME Inc.) an entity formed to acquire and combine two companies, Valley Healthcare Holding, LLC and Northwest Medical, LLC. (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 Company has subsequently expanded its durable medical equipment business through acquisitions in 2019 and 2021.

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

F-9

General Corporate

On December 29, 2020, the Company completed a non-taxable reorganization of the Company's corporate structure, where Great Elm Capital Group, Inc. (GEC) changed its name to Forest Investments, Inc. (Forest) and became a wholly owned subsidiary of a new holding company, Great Elm Group, Inc (GEG). Outstanding shares of Forest under the ticker symbol “GEC” were automatically converted into shares of common stock of Great Elm Group, Inc., ticker symbol “GEG”. Forest common stock was then delisted from the Nasdaq Global Select Market and subsequently deregistered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Holding Company Reorganization (as defined in Note 4 – Holding Company Reorganization and Financing Transaction) was a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders.

Discontinued Operations

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

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

2.Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

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

Assets and liabilities related to the real estate business operating segment on the Company’s consolidated balance sheet as of June 30, 2020 have been reclassified as assets and liabilities of discontinued operations. All assets and liabilities related to discontinued operations are excluded from the notes unless otherwise noted. In addition, the historical results of the real estate business operating segment have been reflected in the accompanying consolidated statements of operations for the years ended June 30, 2021 and 2020 as discontinued operations. See Note 5 – Discontinued Operations.

F-10

Principles of Consolidation

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

All intercompany accounts and transactions have been eliminated in consolidation.

Non-controlling interests in the Company’s subsidiaries are reported as a component of equity, separate from the parent company’s equity or outside of permanent equity for non-controlling interests that are contingently redeemable. See Note 16 – Non-Controlling Interests and Preferred Stock of Subsidiary. Results of operations attributable to the non-controlling interests are included in the Company’s consolidated statements of operations.

Segments

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

Cash and Cash Equivalents

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

Accounts Receivable

The assessment of variable consideration to be constrained is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. There were no material adjustments to revenues made in the year ended June 30, 2021 relating to prior periods. Changes in variable consideration are recorded as a component of net revenues.

F-11

As of June 30, 2021 the Company had unbilled receivables of approximately $0.3 million that relate to transactions where the Company has the ultimate right to invoice a Payor under the terms of the arrangement, but are not currently billed and are therefore contract assets. Such contract assets are included in accounts receivable in the consolidated balance sheets.

Investments

Investments include investments in GECC and other private funds, which are carried at fair value.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under US GAAP. See Note 8 – Fair Value Measurements.

Property, Equipment and Rental Equipment

The Company records property and equipment acquired at cost. The costs of property acquired from asset acquisitions or business combinations is recorded at fair value at the date of acquisition based on its estimated replacement costs.

Within the durable medical equipment businesses, the Company capitalizes the cost of equipment predominantly leased out to patient customers within equipment held for rental, net. These purchases are classified as cash outflows from investing activities when they are paid. The Company capitalizes the cost of equipment predominantly sold to patient customers within inventories. These purchases are classified as cash outflows from operating activities when they are paid. A portion of equipment recorded within equipment held for rental, net, could ultimately be sold. A portion of equipment recorded within inventories could ultimately be leased. Management is not able to accurately project the ultimate use of equipment, which in many cases is determined by Payor reimbursement terms, and has therefore adopted the above stated policy.

Management has estimated the useful lives of equipment leased to customers where title ultimately transfers to customers (e.g., capped rentals, typically 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.

Depreciation is recognized using the straight-line method over their estimated useful lives as follows:

Description Life in Years

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

F-12

Inventories

Inventories, which principally consist of durable medical equipment and related supplies that are predominantly sold, are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventories for items that are potentially excess, obsolete, or slow-moving based on changes in customer demand, technology developments or other economic factors. The Company bases its provisions for excess, expired and obsolete inventory primarily on purchasing activity and usage. A significant change in the timing or level of demand for our products as compared with forecasted amounts may result in recording additional provisions for excess, expired and obsolete inventory in the future. As the Company purchases all of its inventories, all inventories are categorized as finished goods. There were no significant write-offs during the year ended June 30, 2021.

Goodwill and Other Identifiable Intangible Assets

Goodwill represents the excess of fair value over identifiable tangible and intangible net assets acquired in business combinations. Goodwill is not amortized for US GAAP purposes. Instead goodwill is reviewed for impairment at least annually, or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. We perform our annual impairment test on the first day of the fiscal fourth quarter, or as required when impairment triggering events are identified.

The Company amortizes its identifiable intangible assets over their estimated useful lives using a discounted cash flow attribution or straight-line methods as determined appropriate for each identifiable intangible asset. The Company amortizes its identifiable intangible assets over periods ranging from five to fifteen years.

Long-lived Assets

Long-lived assets include property and equipment, intangible assets and the right to use asset. These assets are evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable based on undiscounted cash flows. If an impairment is indicated, the Company records the impaired asset at fair value and records a charge to operations.

Leases and Right of Use Assets

We determine if an arrangement is a lease at inception. As of June 30, 2021, all of our leases are operating leases. Operating leases are included in right of use assets (ROU), current portion of lease liabilities and lease liabilities net of current portion in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide a readily determinable implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU assets also include any lease payments made and adjustments recorded in acquisition accounting. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, primarily consisting of common area maintenance charges, and have elected the practical expedient to account for lease and non-lease components together as a single lease component.

F-13

Cost of Durable Medical Equipment Sold and Services

Cost of durable medical equipment sold and services is comprised of costs included in inventory for medical equipment sold and direct costs associated with providing sleep study services, including staff to perform the studies and supplies used in the studies.

Cost of Durable Medical Equipment Rentals

Cost of rentals includes depreciation on medical equipment held for lease and related maintenance expenses.

Durable Medical Equipment Other Operating Expenses

The Company classifies direct expenses of its durable medical equipment segment, including payroll, facilities and equipment costs, professional fees and other administrative costs, in durable medical equipment other operating expenses in the accompanying consolidated statements of operations.

Investment Management Expenses

The Company classifies all direct expenses of its investment management segment including: payroll, stock-compensation, and related taxes and benefits; facilities costs; and consulting; in investment management expenses in the accompanying consolidated statements of operations. The Company had a contractual 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. This arrangement was not renewed upon expiration.

Depreciation and Amortization

The Company has separately presented depreciation and amortization expense, except for depreciation expense which is included in cost of durable medical equipment rentals as described above. Such depreciation and amortization expense is based on the estimated useful lives of the underlying assets.

Stock-based Compensation

Stock-based compensation costs for eligible employees and directors are measured at fair value on the date of grant and are expensed over the requisite service period using a straight-line attribution method for the entire award that are subject to only service vesting conditions. Awards with both performance and service requirements are expensed using a graded vesting attribution method over the requisite service periods.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary, in order to reduce deferred tax assets to the amounts more likely than not to be recovered.

The Company has established a valuation allowance for its deferred tax assets that are not recoverable from taxable temporary differences because the Company is unable to conclude that future utilization of a portion of its net operating loss carryforwards and other deferred tax assets is more likely than not.

F-14

The calculation of the Company’s tax positions involves dealing with uncertainties in the application of complex tax regulations for federal and several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company does not recognize income tax benefits for positions that it takes on its income tax returns that do not meet the more likely than not standard on its technical merits.

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 within general and administrative expense.

Net Income (Loss) Per Share

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

For the years ended June 30,

(in thousands except per share amounts) 2021 2020

Loss from continuing operations $ (9,328 ) $ (13,346 )

Income from discontinued operations, net of tax 649 219

Net loss attributable to Great Elm Group $ (8,084 ) $ (12,975 )

Weighted average shares basic and diluted:

Weighted average shares of common stock outstanding 25,722 25,418

Weighted average shares used in computing income (loss) per share 25,722 25,418

Basic and diluted income (loss) per share from:

Loss from continuing operations $ (0.34 ) $ (0.52 )

Income from discontinued operations 0.03 0.01

F-15

When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. As of June 30, 2021 the Company had 13,289,022 potential shares of common stock, including 9,891,734 shares of common stock issuable upon the conversion of the Company’s convertible notes, that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive. As of June 30, 2020, the Company had 12,206,044 potential shares of common stock, including 8,790,049 shares of common stock issuable upon the conversion of the Company’s convertible notes, that are not included in the diluted net income (loss) per share calculation because to do so would be antidilutive.

As of June 30, 2021 and 2020, the Company had an aggregate of 732,909 issued shares that are subject to forfeiture by the employee at a nominal price if service and performance milestones are not met. The Company does not account for such shares as being outstanding for accounting purposes since they are unvested and subject to forfeiture.

Restrictions on Subsidiary Dividends

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

Concentration of Risk

The Company’s net investment revenue and receivables from continuing operations are primarily attributable to the management of one investment vehicle, GECC. See Note 7 – Related Party Transactions.

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

For the years ended June 30,

Government Payor 37% 33%

Third-party Payor 12% 11%

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

As of June 30,

Government Payor 30% 23%

Third-party Payor 14% 12%

Recently Adopted Accounting Standards

Fair Value Measurements In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (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 adopted the supplemental disclosures related to level 3 fair value measurements as of July 1, 2020.

F-16

Recently Issued Accounting Standards

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

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

Accounting for Convertible Instruments In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance in this ASU are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company determined to adopt this ASU on July 1, 2021 under the full retrospective method. When our Convertible Notes were originally issued on February 29, 2020, we recorded a $12.6 million discount to additional paid-in capital and against the Convertible Notes due to the existence of a cash conversion feature. As such, upon adoption we will reverse this entry to additional-paid in capital and the Convertible Notes in all periods presented, and will reverse any life-to-date interest expense associated with the amortization of the discount as an adjustment to beginning retained earnings of the prior year. Had this ASU been adopted in the current year, our interest expense and net losses for the years ended June 30, 2021 and 2020 would have been lower by $0.7 million and $0.2 million, respectively.

F-17

3. Revenue

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

For the years ended June 30,

Product and Services Revenue

Investment Management

Durable Medical Equipment

Total product and services revenue $ 40,670 $ 37,545

Rental Revenues

Durable Medical Equipment

Revenue Accounting Under Topic 606

In determining the appropriate amount of revenue to be recognized under FASB Accounting Standards Codification Topic 606, Revenues, (Topic 606), the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the performance obligations; and (v) recognized revenue when (or as) the Company satisfies each performance obligation.

Durable Medical Equipment Revenue

Equipment Sales and Services Revenues

The Company 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.

F-18

The transaction price on both equipment sales and sleep studies is the amount that the Company expects to receive in exchange for the goods and services provided. Due to the nature of the durable medical equipment business, billing adjustments customarily occur during the collections process when explanations of benefits are received by Payors, and as amounts are deferred to secondary Payors or to patient responsibility. As such, we constrain the transaction price for the difference between the amounts billed and what we believe we will collect from Payors and from patients. The transaction price therefore is predominantly based on contractual payment rates determined by the Payors. The Company does not generally contract with uninsured customers. We determine our estimates of billing adjustments based upon contractual agreements, our policies and historical experience. While the rates are fixed for the product or service with the customer and the Payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, from the patient customer. The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the Payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments we estimate will not be collected.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. The Company constrains revenue for these estimated adjustments. During the year ended June 30, 2021, there were no material changes in estimates relating to prior periods.

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

The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not incur contract acquisition costs. The Company generally does not have any partially or unfilled performance obligations related to contracts with customers. However, during the quarter ended June 30, 2020, the Company applied for and received $4.4 million in advanced payments from the Centers for Medicare and Medicaid Services (CMS) under their Accelerated and Advance Payment Program, which was expanded to increase cash flow to providers of services and suppliers impacted by the 2019 Novel Coronavirus (COVID-19) pandemic. We have issued recoupments of $0.9 million during the year ended June 30, 2021, leaving a remaining balance of $3.5 million. The Company has no other contract liabilities as of June 30, 2021 or 2020.

Included in sales and services revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the Payor. The estimate of net unbilled sales and service revenue recognized is based on historical trends and estimates of future collectability. As of June 30, 2021 and 2020, net unbilled sales and service revenue is approximately $0.2 million and $0.3 million, respectively, and is included in accounts receivable.

Investment Management Revenue

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

F-19

Management Fees

The Company earns management fees based on the investment management agreement GECM has with GECC and other private funds managed by GECM (collectively, the Funds). The performance obligation is satisfied over time as the services are rendered, since GECC simultaneously receives and consumes the benefits provided as GECM performs services. Management fee rates range from 1% to 1.50% of the management fee assets specified within each agreement. Based on the terms of the specific agreement, management fees may be calculated and billed in advance or in arrears of the period, no less frequently than quarterly. Management fee revenue is recognized over time as the services are provided.

Incentive Fees

GEG US Equity

GEG · 10-K · period ended 2021-06-30

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits, Financial Statement Schedules.

Item 16. Form 10-K Summary.

GEG US Equity☆

GEG · 10-K · period ended 2021-06-30

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accountant Fees and Services.

Item 15. Exhibits, Financial Statement Schedules.

Item 16. Form 10-K Summary.

GEG US Equity