Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2022

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

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

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

Use of Estimate

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

Principles of Consolidation

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

All intercompany accounts and transactions have been eliminated in consolidation.

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

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

Segments

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

Cash and Cash Equivalents

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

Accounts Receivable

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

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

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

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

Net Income (Loss) per Share

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


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

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

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

Restrictions on Subsidiary Dividends

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

Concentration of Risk

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

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


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

(1)

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

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


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

Recently Adopted Accounting Standards

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

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


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

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

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

(1)

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

Recently Issued Accounting Standards

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

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