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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16073

Great Elm Capital Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3219054
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
800 South Street, Suite 230, Waltham MA	02453
(Address of principal executive offices)	(Zip Code)

(617) 375-3006

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

GEC

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2020, there were 26,395,328 shares of the registrant’s common stock outstanding

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020	3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019	4
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three months ended September 30, 2020	5
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Contingently Redeemable Non-Controlling Interest for the three months ended September 30, 2019	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2019	7
	Unaudited Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION		45

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

SIGNATURES		48

Unless the context otherwise requires, “we”, “us”, “our”, “GEC”, the “Company” and terms of similar import refer to Great Elm Capital Group, Inc. and/or its subsidiaries. Our corporate website address is www.greatelmcap.com. The information contained in, or accessible through, our corporate website does not constitute part of this report.

Cautionary Statement Regarding Forward-Looking Information

This report and certain information incorporated herein by reference, contain forward‑looking statements under the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” and other similar phrases. Although we believe the assumptions and expectations reflected in these forward‑looking statements are reasonable, these assumptions and expectations may not prove to be correct and we may not achieve the financial results or benefits anticipated. These forward‑looking statements are not guarantees of actual results. Our actual results may differ materially from those suggested in the forward‑looking statements. These forward‑looking statements involve a number of risks and uncertainties, some of which are beyond our control, including, without limitation:

▪

the ability of Great Elm Capital Management, Inc. (GECM) to profitably manage Great Elm Capital Corp. (NASDAQ: GECC), a business development company GECM manages through our investment management business;

▪

the dividend rate that GECC will pay;

▪

our ability to continue to develop and grow our durable medical equipment, investment management and real estate businesses;

▪

our ability to raise capital to fund our business plan;

▪

our ability to make acquisitions and manage any businesses we may acquire;

▪

conditions in the equity capital markets and debt capital markets as well as the economy generally;

▪

our ability to maintain the security of electronic and other confidential information;

▪

serious disruptions and catastrophic events, including the impact of Coronavirus Disease 2019 (COVID‑19) on the global economy;

▪

competition, mostly from larger, well-financed organizations (both domestic and foreign), including operating companies, global asset managers, investment banks, commercial banks, and private equity funds;

▪

outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith;

▪

maintaining our contractual arrangements and relationships with third parties;

▪

our ability to attract, assimilate and retain key personnel;

▪

compliance with laws, regulations and orders;

▪

changes in laws and regulations governing our operations; and

▪

other factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 under “Risk Factors” or as set forth from time to time in our Securities and Exchange Commission (SEC) filings.

These forward‑looking statements speak only as of the time of filing of this report and we do not undertake to update or revise them as more information becomes available. You are cautioned not to place undue reliance on these forward‑looking statements. We do not undertake any obligation to release publicly any revisions to these forward‑looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Great Elm Capital Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

Dollar amounts in thousands (except per share data)

ASSETS	September 30, 2020			June 30, 2020
Current assets:
Cash and cash equivalents	$	22,465		$	40,519
Restricted cash		889			846
Accounts receivable		7,771			7,991
Related party receivables		1,124			1,059
Investments, at fair value (cost $30,717 and $30,279, respectively)		7,241			8,705
Inventories		1,127			1,470
Receivable for securities purchased		13,560			-
Prepaid and other current assets		1,067			738
Total current assets		55,244			61,328
Real estate assets, net		52,882			53,188
Property and equipment, net		1,286			1,410
Equipment held for rental, net		7,053			7,483
Identifiable intangible assets, net		14,578			15,129
Goodwill		50,010			50,010
Right of use assets		4,993			5,392
Other assets		1,622			1,505
Total assets	$	187,668		$	195,445
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,908		$	5,007
Accrued expenses and other liabilities		4,129			3,565
Deferred revenue		5,278			5,652
Current portion of lease liabilities		1,481			1,617
Current portion of long term debt		2,369			6,221
Current portion of related party notes payable		1,494			1,418
Current portion of equipment financing debt		1,572			2,034
Total current liabilities		21,231			25,514
Lease liabilities, net of current portion		3,789			4,060
Long term debt, net of current portion		52,889			52,781
Related party notes payable, net of current portion		26,076			26,485
Convertible Notes (face value $30,521, including $13,277 held by related parties)		17,635			17,444
Equipment financing debt, net of current portion		158			196
Other liabilities		754			395
Total liabilities		122,532			126,875
Commitments and Contingencies (Note 16)
Contingently redeemable non-controlling interest		3,844			3,890
Stockholders' equity
Preferred stock, $0.001 par value; 5,000 authorized and zero outstanding		-			-
Common stock, $0.001 par value; 350,000,000 shares authorized and 26,308,532 shares issued and 25,645,317 outstanding at September 30, 2020; and 26,217,380 shares issued and 25,529,534 outstanding at June 30, 2020		26			26
Additional paid-in-capital		3,318,546			3,318,117
Accumulated deficit		(3,261,105	)		(3,257,349	)
Total Great Elm Capital Group, Inc. stockholders' equity		57,467			60,794
Non-controlling interests		3,825			3,886
Total stockholders' equity		61,292			64,680
Total liabilities, non-controlling interest and stockholders' equity	$	187,668		$	195,445

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

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

Dollar amounts in thousands (except per share data)

	For the three months ended September 30,
	2020			2019
Revenues:
Durable medical equipment sales and services revenue	$	9,213		$	7,745
Durable medical equipment rental income		5,397			5,486
Investment management revenues		773			867
Real estate rental income		1,272			1,273
Total revenues		16,655			15,371

Operating costs and expenses:
Cost of durable medical equipment sold and services		4,207			3,463
Cost of durable medical equipment rentals (includes depreciation expense of $1,748 and $2,051, respectively)		1,915			2,265
Durable medical equipment other operating expenses		7,680			6,849
Investment management expenses		726			691
Real estate expenses		125			124
Depreciation and amortization		1,021			1,067
Selling, general and administrative		1,413			1,786
Total operating costs and expenses		17,087			16,245
Operating loss		(432	)		(874	)
Dividends and interest income		529			514
Unrealized loss on investment in GECC		(1,902	)		(983	)
Interest expense		(1,957	)		(1,696	)
Other (expense) income, net		(2	)		3
Loss from continuing operations, before income taxes		(3,764	)		(3,036	)
Income tax expense		(99	)		(242	)
Loss from continuing operations		(3,863	)		(3,278	)
Net loss	$	(3,863	)	$	(3,278	)
Less: net loss attributable to non-controlling interest		(107	)		(189	)
Net loss attributable to Great Elm Capital Group	$	(3,756	)	$	(3,089	)
Basic loss per share
Continuing operations	$	(0.15	)	$	(0.12	)
Discontinued operations		-			-
Net loss	$	(0.15	)	$	(0.12	)
Diluted loss per share from:
Continuing operations	$	(0.15	)	$	(0.12	)
Discontinued operations		-			-
Net loss	$	(0.15	)	$	(0.12	)
Weighted average shares outstanding
Basic		25,576			25,373
Diluted		25,576			25,373

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

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amounts in thousands

Dollar and share amounts in thousands	Common Stock				Additional Paid-in		Accumulated			Total Great Elm Capital Group Inc. Stockholders'			Non- controlling			Total Stockholders'			Contingently Redeemable Non-controlling
	Shares		Amount		Capital		Deficit			Equity			Interest			Equity			Interest
BALANCE, June 30, 2020		25,530	$	26	$	3,318,117	$	(3,257,349	)	$	60,794		$	3,886		$	64,680		$	3,890
Net loss		-		-		-		(3,756	)		(3,756	)		(61	)		(3,817	)		(46	)
Issuance of common stock related to vesting of restricted stock		116		0		-		-			-			-			-			-
Stock-based compensation				-		429		-			429			-			429			-
BALANCE, September 30, 2020		25,646	$	26	$	3,318,546	$	(3,261,105	)	$	57,467		$	3,825		$	61,292		$	3,844

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

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity and Contingently Redeemable Non-controlling Interest (Unaudited)

Dollar and share amounts in thousands

	Common Stock				Additional Paid-in		Accumulated			Total Great Elm Capital Group Inc. Stockholders'			Non- controlling			Total Stockholders'			Contingently Redeemable Non-controlling
	Shares		Amount		Capital		Deficit			Equity			Interest			Equity			Interest
BALANCE, June 30, 2019		25,353	$	25	$	3,305,415	$	(3,244,374	)	$	61,066		$	4,016		$	65,082		$	3,912
Net loss		-		-		-		(3,089	)		(3,089	)		(109	)		(3,198	)		(80	)
Issuance of common stock related to vesting of restricted stock		30		0		0		-			0			-			0			-
Stock-based compensation		-		-		293		-			293			-			293			-
BALANCE, September 30, 2019		25,383	$	25	$	3,305,708	$	(3,247,463	)	$	58,270		$	3,907		$	62,177		$	3,832

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

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Dollar amounts in thousands

	For the three months ended September 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(3,863	)	$	(3,278	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,769			3,118
Stock-based compensation		429			293
Unrealized loss on investments		1,902			983
Stock dividends received from GECC		(438	)		-
Non-cash interest and amortization of debt issuance costs		432			234
Deferred tax benefit related to continuing operations		92			-
Other non-cash expense, net		399			294
Gain on sale of equipment held for rental		(62	)		(185	)
Change in fair value of contingent consideration		-			(195	)
Changes in operating assets and liabilities:
Related party receivable		(65	)		81
Accounts receivable		220			390
Inventories		343			(208	)
Prepaid assets, deposits, and other assets		(446	)		(312	)
Operating leases		(407	)		(306	)
Related party payable		-			(733	)
Deferred revenues		(374	)		12
Accounts payable, accrued liabilities and other liabilities		835			933
Net cash provided by operating activities		1,766			1,121
Cash flows from investing activities:
Purchases of investments		(13,560	)
Purchases of equipment held for rental		(1,606	)		(2,078	)
Proceeds from sale of equipment held for rental		251			669
Purchases of property and equipment		(44	)		(17	)
Proceeds from sale of property and equipment		-			37
Net cash used in investing activities		(14,959	)		(1,389	)

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

Great Elm Capital Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

Dollar amounts in thousands

	For the three months ended September 30,
	2020			2019
Cash flows from financing activities:
Proceeds on revolving line of credit		-			-
Principal payments on revolving line of credit		(3,400	)		(500	)
Principal payments on long term debt		(565	)		(524	)
Principal payments on related party notes payable		(353	)		(961	)
Principal payments on equipment financing debt		(1,058	)		(580	)
Proceeds from equipment financing debt		558			858
Net cash used in financing activities		(4,818	)		(1,707	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(18,011	)		(1,975	)
Cash, cash equivalents and restricted cash at beginning of year		41,365			12,830
Cash, cash equivalents and restricted cash at end of year	$	23,354		$	10,855

Cash paid for interest	$	1,112		$	2,240

Non-cash investing and financing activities
Lease liabilities and right of use assets arising from operating leases	$	-		$	198

The following table reconciles the amounts shown for cash and cash equivalents and restricted cash in the condensed consolidated balance sheets to the amounts shown for cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows.

	September 30, 2020		June 30, 2020
Cash and cash equivalents	$	22,465	$	40,519
Restricted cash		889		846
Cash, cash equivalents and restricted cash	$	23,354	$	41,365

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

Great Elm Capital Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2020

1. Organization

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

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Wholly-owned subsidiaries include Great Elm Capital Management, Inc. (GECM), Great Elm Opportunities GP, Inc., Great Elm FM Acquisition, Inc., Great Elm DME Holdings, Inc. and Great Elm DME Manager, LLC. Majority-owned subsidiaries include GECC GP Corp., Great Elm FM Holdings, Inc., CRIC IT Fort Myers, LLC (CRIC IT) and Great Elm DME, Inc. (DME Inc.) and its seven wholly-owned subsidiaries.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in the Company’s Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. The condensed consolidated balance sheet as of June 30, 2020, presented herein, has been derived from the Company’s audited consolidated financial statements as of and for the year-ended June 30, 2020.

Use of Estimates

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. The most important of these estimates and assumptions relate to revenue recognition, recognition of rental income, 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 13 – Non-Controlling Interests of Subsidiary. Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations.

Segments

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

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 $4.6 million and $4.8 million as of September 30, 2020 and June 30, 2020, respectively. During the three months ended September 30, 2020 and 2019, the Company recognized reductions to revenue of $1.1 million and $0.9 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 three months ended September 30, 2020 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 September 30, 2020 and June 30, 2020, the Company had unbilled receivables of approximately $1.5 million and $1.9 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. Previously disclosed unbilled amounts have been updated to reflect current presentation. 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 earnings (loss) per share:

	For the three months ended September 30,
(in thousands except per share amounts)	2020			2019
Loss from continuing operations	$	(3,863	)	$	(3,278	)
Net loss	$	(3,863	)	$	(3,278	)
Less: net loss attributable to non-controlling interest		(107	)		(189	)
Net loss attributable to Great Elm Capital Group	$	(3,756	)	$	(3,089	)
Weighted average shares basic and diluted:
Weighted average shares of common stock outstanding		25,576			25,373
Weighted average shares used in computing income (loss) per share		25,576			25,373
Basic and diluted income (loss) per share from:
Loss from continuing operations	$	(0.15	)	$	(0.12	)
Net loss	$	(0.15	)	$	(0.12	)

When calculating earnings per share, we are required to adjust for the dilutive effect of common stock equivalents. As of September 30, 2020, the Company had 12,134,751 potential shares of common stock, including 8,790,049 potential shares of Company common stock issuable upon conversion of Convertible Notes (as defined in Note 11 – Convertible Notes) and 3,344,702 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 loss per share calculations because to do so would be antidilutive. As of September 30, 2019, the Company had 3,290,624 potential shares of Company common stock issuable upon exercise of the stock options and vesting of restricted stock units and restricted stock awards that are not included in the diluted net loss per share calculations because to do so would be antidilutive.

As of September 30, 2020 and 2019, 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

Under the GP Corp. Note Agreement, GECC GP Corp. agreed not to declare any dividends until the GP Corp. Note is satisfied. Under the Senior Note and Subordinated Note, CRIC IT Fort Myers, LLC is restricted from paying any dividends until the Notes are satisfied. The ability of DME Inc. to pay dividends is subject to compliance with the restricted payment covenants under the Corbel Facility and DME Revolver.

Concentration of Risk

The Company’s net investment revenue and receivables for the periods presented were attributable to the management of one investment vehicle, GECC, which is also a related party. See Note 4 – Related Party Transactions.

The Company’s real estate rental revenue from continuing operations is derived from one tenant.

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 September 30,
	2020	2019
Government Payor A	34%	28%
Third-party Payor C	11%	*

* Not a significant concentration.

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

	September 30, 2020	June 30, 2020
Government Payor A	23%	20%
Government Payor B	*	11%
Third-party Payor C	11%	11%

* Not a significant concentration

Recently Adopted Accounting Standards

Fair Value Measurements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, resulting in various disclosures related to fair value measurements being eliminated, modified or supplemented. ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019, with an option to early adopt any eliminated or modified disclosures, and to delay adoption of the additional disclosures, until the effective date. The Company early adopted the eliminated and modified disclosures of ASU 2018-13 during the three months ended September 30, 2018 and, as a result, updated its financial statement disclosures accordingly. A modified narrative description of measurement uncertainty for level 3 fair value measurements was applied prospectively, with all other amendments applied retrospectively. The Company has adopted the supplemental disclosures as of July 1, 2020.

Recently Issued Accounting Standards

Current Expected Credit Losses In June 2016, the FASB issued Accounting Standards Update (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 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.

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 is currently evaluating the impact of this ASU on its consolidated financial statements.

3. Revenue

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

	For the three months ended September 30,
(in thousands)	2020		2019
Product and Services Revenue
Investment Management
Management Fees	$	601	$	758
Administration Fees		172		109
		773		867
Durable Medical Equipment
Equipment Sales		8,008		6,361
Service Revenues		1,205		1,384
		9,213		7,745

Total product and services revenue	$	9,986	$	8,612

Rental Revenues
Real Estate
Rental Income		1,272		1,273
Durable Medical Equipment
Medical Equipment Rental Income		5,397		5,486
Total rental revenue		6,669		6,759

Total	$	16,655	$	15,371

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

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

The transaction price on both equipment sales and sleep studies is the amount that the Company expects to receive in exchange for the goods and services provided. Due to the nature of the durable medical equipment business, 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 gross charge and what we believe we will collect from Payors and from patients. The transaction price therefore is predominantly based on contractual payment rates determined by the Payors. The Company does not generally contract with uninsured customers. We determine our estimates of 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. There were no material changes in estimates recorded in the three months ended September 30, 2020, relating to prior periods.

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

The Company may provide shipping services prior to the point of delivery and has concluded that the services represent a fulfilment activity and not a performance obligation. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not incur contract acquisition costs. The Company does not have any partially or unfilled performance obligations related to contracts with customers. 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 COVID-19 pandemic. These advance payments will begin to be recouped against the Company’s future Medicare and Medicaid claims beginning in the fourth quarter of our fiscal year 2021. These amounts are included within deferred revenue on the condensed consolidated balance sheet. The Company has no other contract liabilities as of September 30, 2020 or June 30, 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 rental revenue recognized is based on historical trends and estimates of future collectability. As of September 30, 2020 and June 30, 2020, net unbilled sales and services revenue is approximately $1.0 million and $1.2 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 product and may be terminated at any time by either party subject to the specific terms of each respective agreement.

Management Fees

The Company earns management fees based on the investment management agreement GECM has with GECC. The performance obligation is satisfied over time as the services are rendered, since GECC simultaneously receives and consumes the benefits provided as GECM performs services. Under GECC’s investment management agreement with GECM, the base management fee from GECC is calculated at an annual rate of 1.50% of GECC’s average adjusted gross assets. The base management fee is calculated based on the average value of GECC’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and is recognized over time as the services are provided. Management fees are billed quarterly in arrears.

Incentive Fees

The Company earns incentive fees based on the investment management agreements GECM has with GECC and separately managed accounts. Where an investment management agreement includes both management fees and incentive fees, the performance obligation is considered to be a single obligation for both fees. Incentive fees are variable consideration associated with the GECC investment management agreement. Incentive fees are recognized based on investment performance during the period, subject to the achievement of minimum return levels or high-water marks, in accordance with the terms of the respective investment management agreements. Incentive fees range from 5.0% to 20.0% of the performance-based metric specified within each agreement. 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 September 30, 2020, there is $8.9 million in incentive fees which have been earned per the terms of the investment management agreements but not recognized as they are still subject to the constraints described above.

Administration Fees

The Company earns administration fees based on the administration agreement GECM has with GECC whereby GECC reimburses GECM for costs incurred in performing administrative functions for GECC. This revenue is recognized over time as the services are performed. Administrative fees are billed quarterly in arrears, which is consistent with the timing of the delivery of services and reflect agreed upon rates for the services provided. The services are accounted for as a single performance obligation that is a series of distinct services with substantially the same pattern of transfer as the services are provided on a daily basis.

Revenue Accounting Under Topic 842

Durable Medical Equipment Revenue

Equipment Rental Revenue

Under FASB Accounting Standards Codification Topic 842, Leases, (Topic 842) rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. The Company leases durable medical equipment to customers for a fixed monthly amount on a month-to-month basis. The contractual length of the lease term varies based on the type of equipment that is rented to the customer, but generally is from 10 to 36-months. In the case of capped rental agreements, title to the equipment transfers to the customer at the end of the contractual rental period. The customer has the right to cancel the lease at any time during the rental period for a subsequent month’s rental and payments are generally billed in advance on a month-to-month basis. Under Topic 842, rental income from operating leases is recognized on a month-to-month basis, based on contractual lease terms when collectability is reasonably assured. Certain customer co-payments are included in revenue when considered probable of payment.

The lease term begins on the date products are delivered to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. There were no material changes in estimates recorded in the three months ended September 30, 2020, relating to prior periods.

Although invoicing typically occurs at the beginning of the monthly rental period, we recognize revenue from rentals on a daily basis. Since rental agreements can commence at any time during a given month, we defer revenue related to the remaining monthly rental period as of period end. Deferred revenue related to rentals was $0.9 million and $1.3 million as of September 30, 2020 and June 30, 2020, respectively.

Included in rental revenue are unbilled amounts for which the revenue recognition criteria had been met as of period end but were not yet billed to the Payor. Net unbilled rental revenue is recognized to the extent payment is probable. As of September 30, 2020 and June 30, 2020, net unbilled rental revenue is approximately $0.5 million and $0.7 million, respectively, and is included in accounts receivable.

Real Estate Revenue

Rental Revenue

Consistent with the leases of durable medical equipment, the Company recognizes rental revenue on a straight-line basis over the non-cancelable term of the lease. Under the terms of the lease, the Company may recover from the tenant certain expenses, including: real estate taxes, insurance and other operating expenses. The recovery of these expenses is recognized in rental income in the accompanying condensed consolidated statements of operations, in the same periods as the expenses are incurred. These expenses recognized in both revenue and expense may fluctuate from period to period based on actual expense amounts.

4. Related Party Transactions

Related party transactions are measured in part by the amount of consideration paid or received as established and agreed by the parties. Consideration paid for such services in each case is the negotiated value.

Durable Medical Equipment

In connection with the acquisition of the durable medical equipment businesses in September 2018, DME Inc. and its subsidiaries entered into a term loan agreement with Corbel Capital Partners SBIC, L.P. (Corbel) (the Corbel Facility). Jeffrey S. Serota, a member of the Company’s Board of Directors, serves as Vice Chairman to Corbel Capital Partners. Corbel previously held an interest in one of our acquired durable medical equipment businesses and was one of the sellers in our acquisition of the business. As a result of the acquisition, at September 30, 2020 Corbel holds a non-controlling interest in DME Inc. Pursuant to the Corbel Facility, Corbel was paid a structuring fee, will be paid an ongoing quarterly monitoring fee, and may be paid a deferred structuring fee if the loans are subject to early repayment. See Note 10 - Borrowings for additional information on the Corbel Facility and Note 13 – Non-Controlling Interests of Subsidiary.

In connection with the acquisition of the durable medical equipment businesses, the Company issued non-controlling interests in DME Inc. to the former owners, including Corbel discussed above. Additionally, the Company has contingent consideration to the sellers, currently valued at zero. See Note 5 – Fair Value Measurements for additional details.

Investment Management

The Company’s wholly-owned subsidiary, GECM, has agreements to provide administrative services and manage the investment portfolio for GECC. Under these agreements, GECM receives administrative fees, management fees based on GECC’s assets (other than cash and cash equivalents) and incentive fees if GECC has net capital gains or if its net investment income exceeds a specified hurdle rate. Fees under the agreements began to accrue on November 4, 2016. See Note 3 – Revenue for additional discussions of the fee arrangements.

All of the Company’s investment management revenue recognized for the periods presented was generated from the management and administration of GECC. Additionally, the Company receives dividends from its investment in GECC and earns unrealized profits and losses based on the mark-to-market performance of GECC. See Note 5 – Fair Value Measurements.

The following tables summarize activity and outstanding balances between the managed investment products and the Company.

	For the three months ended September 30,
(in thousands)	2020			2019
Change in unrealized loss on investment in GECC	$	(1,902	)	$	(983	)
GECC dividend income		524			490

(in thousands)	September 30, 2020		June 30, 2020
Dividends receivable from GECC	$	178	$	170
Investment management revenues receivable		772		746
Receivable for reimbursable expenses paid		174		158

Outstanding receivables are included in related party receivables in the condensed consolidated balance sheets.

The Company is the owner of approximately 19.6% of the outstanding shares of GECC, and the Company’s Chief Executive Officer is also the Chief Executive Officer of GECC and Chief Investment Officer of GECM, in addition to being a member of the board of directors of the Company and chairman of the board of GECC. The Company’s President and Chief Operating Officer is also the Chief Operating Officer, Chief Compliance Officer and General Counsel of GECM and the Chief Compliance Officer of GECC.

On August 31, 2020, GECC announced a non-transferable rights offering to purchase shares of its common stock. The Company committed to fully exercising its rights and oversubscribed for a total aggregate commitment of up to $13.6 million in shares of common stock. This commitment is included in the receivable for securities purchased on the consolidated balance sheet as of September 30, 2020. On October 1, 2020, GECC announced the results of the non-transferable rights offering in which the Company received 2,966,531 shares at a price of $2.95 per share for an aggregate total of $8.8 million. As a result, after the closing of the non-transferable rights offering, the Company was the owner of approximately 23.5% of the outstanding shares of GECC.

GECM has a profit sharing agreement with the Company’s majority-owned subsidiary GECC GP Corp. (Profit Sharing Agreement). Under the Profit Sharing Agreement, GECM’s profit from GECC is paid to GECC GP Corp. Since its inception in November 2016, GECM has operated at a cumulative loss through September 30, 2020; correspondingly, no profits were available to GECC GP Corp. under the Profit Sharing Agreement. Certain employees of the Company have a non-controlling interest in GECC GP Corp. See Note 13 – Non-Controlling Interests of Subsidiary.

The Company’s wholly-owned subsidiary, Great Elm Opportunities GP, Inc. (GEO GP) serves as the general partner of Great Elm Opportunities Fund I, LP (GEOF). As the general partner, GEO GP provides administrative services and manages the investment portfolio of GEOF. Based on the performance of GEOF’s investment portfolio, GEO GP may be entitled to certain incentive allocations. GEOF began investing in July 2018 and through September 30, 2020 no incentive allocations have been made to GEO GP.

MAST Capital Management, LLC (MAST Capital) is the beneficial owner of approximately 7.6% of the Company’s outstanding common stock as of September 30, 2020. See Note 10 - Borrowings for additional discussion of the GP Corp. Note.

Real Estate

In connection with the acquisition of the real estate business in March 2018, the Company issued the former owner a 19.9% interest in Great Elm FM Holdings, Inc. (GE FM Holdings). See Note 13 – Non-Controlling Interests of Subsidiary.

5. Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

US GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

▪

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

▪

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

▪

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below:

	Fair Value as of September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Investment in GECC	$	7,241	$	-	$	-	$	7,241
Total assets	$	7,241	$	-	$	-	$	7,241
Liabilities:
Contingent consideration liability	$	-	$	-	$	-	$	-
Total liabilities	$	-	$	-	$	-	$	-

	Fair Value as of June 30, 2020
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment in GECC	$	8,705	$	-	$	-	$	8,705
Total assets	$	8,705	$	-	$	-	$	8,705
Liabilities:
Contingent consideration liability	$	-	$	-	$	-	$	-
Total liabilities	$	-	$	-	$	-	$	-

The following is a reconciliation of changes in contingent consideration, a Level 3 liability, for the three months ended September 30, 2020:

	For the three months ended September 30,
(in thousands)	2020		2019
Beginning Balance	$	-	$	1,135
Change in fair value		-		(195	)
Ending Balance	$	-	$	940

The contingent consideration arrangement requires the Company to pay up to $2.1 million of additional consideration to the former shareholders of the durable medical equipment businesses if certain earnings before interest, taxes, depreciation and amortization (EBITDA) thresholds, as adjusted per the terms of the purchase agreement, were achieved for the 12 months ended December 31, 2019. The Company determined that the EBITDA achieved, as adjusted per terms of the contract, for the 12 months ended December 31, 2019 was below the earnout threshold for payout. As such, during the year ended June 30, 2020, the fair value of the contingent consideration was updated to zero. The finalization of the earnout is subject to agreement with the former shareholders of the durable medical equipment businesses.

The Company is the owner of approximately 19.6% (or 2,142,238 shares) of the outstanding shares of GECC and values its ownership based on the NASDAQ-listed market price of GECC common stock (a Level 1 input in accordance with the US GAAP fair value hierarchy).

There were no transfers between levels of the fair value hierarchy during the three months ended September 30, 2020 and 2019.

6. Fixed Assets

The Company’s fixed assets consist of its leased real estate assets, medical equipment held for rental, furniture and fixtures, and leasehold improvements used in its operations. The following tables detail the Company’s fixed assets:

(in thousands)	September 30, 2020			June 30, 2020
Real Estate Assets
Buildings	$	43,355		$	43,355
Land and site improvements		9,170			9,170
Tenant improvements		3,500			3,500
		56,025			56,025
Accumulated depreciation		(3,143	)		(2,837	)
Net carrying amount	$	52,882		$	53,188

Property and Equipment
Leasehold improvements	$	858		$	858
Vehicles		232			237
Computer equipment and software		318			277
Furniture and fixtures		415			417
Sleep study equipment		592			589
		2,415			2,378
Accumulated depreciation		(1,129	)		(968	)
Net carrying amount	$	1,286		$	1,410

Medical Equipment Held for Rental
Medical equipment held for rental	$	13,759		$	13,828
Accumulated depreciation		(6,706	)		(6,345	)
Net carrying amount	$	7,053		$	7,483

The following table reconciles depreciation expense included in the following lines of the condensed consolidated statements of operations to total depreciation expense for each period presented.

	For the three months ended September 30,
(in thousands)	2020		2019
Depreciation and amortization	$	470	$	428
Cost of durable medical equipment rentals		1,748		2,051
Total depreciation expense	$	2,218	$	2,479

7. Goodwill and Other Intangible Assets

The Company’s investment management and real estate segments include identifiable intangible assets acquired through acquisitions in prior years. In connection with the acquisition of the durable medical equipment businesses, the Company has also recognized goodwill and identifiable intangible assets associated with the tradenames and non-compete agreements. The Company’s annual impairment assessment date for goodwill and other intangible assets is April 1.

Goodwill of $50.0 million presented on the condensed consolidated balance sheet consists only of the goodwill acquired as part of the acquisitions of the durable medical equipment businesses in September 2018 and June 2019.

The changes in the carrying value of goodwill are as follows:

	For the three months ended September 30,
	2020		2019
(in thousands)
Beginning Balance	$	50,010	$	50,397
Purchase accounting adjustment		-		36
Ending Balance	$	50,010	$	50,433

The following tables provide details associated with the Company’s identifiable intangible assets subject to amortization (dollar amounts in thousands):

	As of September 30, 2020							As of June 30, 2020
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Durable Medical Equipment
Tradename	$	8,800	$	(1,834	)	$	6,966	$	8,800	$	(1,613	)	$	7,187
Non-compete agreements		1,360		(654	)		706		1,360		(573	)		787
		10,160		(2,488	)		7,672		10,160		(2,186	)		7,974

Investment Management
Investment management agreement		3,900		(1,997	)		1,903		3,900		(1,887	)		2,013
Assembled workforce		526		(269	)		257		526		(255	)		271
		4,426		(2,266	)		2,160		4,426		(2,142	)		2,284
Real Estate
In-place lease		6,028		(1,282	)		4,746		6,028		(1,157	)		4,871

Total	$	20,614	$	(6,036	)	$	14,578	$	20,614	$	(5,485	)	$	15,129

Aggregate Amortization Expense (in thousands)		2020				2019
For the three months ended September 30,		$	551			$	639

Estimated Future Amortization Expense (in thousands):
For the nine months ending June 30, 2021	$	1,605
For the year ending June 30, 2022		1,981
For the year ending June 30, 2023		1,894
For the year ending June 30, 2024		1,702
For the year ending June 30, 2025		1,597
Thereafter	$	5,799

8. Lessor Operating Leases

Medical Equipment Leases

Through its majority-owned subsidiary DME Inc., and the subsidiaries of DME Inc., the Company owns medical equipment which is leased to customers. The Company’s customers consist primarily of patients through their clinical providers including medical centers, clinics and hospices and the Company has lease arrangements with these patients. In addition, the arrangements between the Company and its customers are impacted by arrangements between the Company and Payors. The Payors may cover a portion or all of the rental payments under the agreements between the Company and its customers. The patient is responsible for any residual co-payments.

The lease terms may be for a pre-determined time period, generally 10 months to 36 months; however, the customer may cancel the lease at any time and for any reason without penalty and therefore, the Company treats all leases as month-to-month leases. Upon termination of the lease, the equipment, if not aged beyond its useful life, may be refurbished and subsequently sold or leased to another customer. As the leases are month-to-month, there are no future lease receivables under the terms of the current leases.

Real Estate Leases

The Company’s majority-owned subsidiary CRIC IT Fort Myers LLC (Property Owner) owns a fee simple interest in two Class A office buildings, Gartner I and Gartner II (collectively, the Property). The Property is fully leased, on a triple net basis, to Gartner, Inc. (Gartner) until March 31, 2030, which may be extended at the option of Gartner in accordance with the terms of the lease. The Gartner I lease contains two five-year extensions and the Gartner II lease contains three five-year extensions (collectively, the Leases). Under the terms of the Leases, the renewal rates are equal to 95% of the then fair market rent, and the tenant does not have a purchase option at the end of the lease term. The leases require Gartner to make a base monthly lease payment of approximately $0.4 million as calculated on a straight line basis over the remaining expected lease term plus additional rent payments for additional costs. Additional rental payments are due for Property Owner costs, such as property taxes, management fees, and insurance costs, as incurred. See Note 3 – Revenue for additional discussion of rental revenues.

The Property is subject to mortgage, security agreement and assignment of leases and rents with the senior and subordinated lenders, which is further described in Note 10 - Borrowings. The Property Owner has assigned all rights, title and interest in and to the Property and the Leases to the senior and subordinated lenders and all amounts received are paid to a trust which funds the operating costs associated with the Property. The Company does not have rights to these rent payments while the borrowings remain outstanding.

The Company expects to derive value from the residual value at the end of the existing lease term by further leasing the assets or through a sale transaction.

Rental income from real estate leases is summarized in the following table:

	For the years ended September 30,
(in thousands)	2020		2019
Revenues from base rents	$	1,151	$	1,151
Revenues from additional rental payments		121		122
Total rental revenues	$	1,272	$	1,273

The following table summarizes the base rents for the remaining lease term:

(in thousands)	Base Rent Payments
For the nine months ending June 30, 2021	$	3,169
For the year ending June 30, 2022		4,312
For the year ending June 30, 2023		4,419
For the year ending June 30, 2024		4,529
For the year ending June 30, 2025		4,648
Thereafter		24,025
Total base rent	$	45,102

9. Lessee Operating Leases

All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets. The following table provides additional details of the leases presented in the balance sheets:

(in thousands)	September 30, 2020			June 30, 2020
Facilities
Right of use assets	$	4,881		$	5,265

Current portion of lease liabilities		1,428			1,560
Lease liabilities, net of current portion		3,730			3,990
Total liabilities	$	5,158		$	5,550

Weighted-average remaining life	3.8 years			3.9 years
Weighted-average discount rate		11.7	%		11.7	%

Vehicles
Right of use assets	$	56		$	61

Current portion of lease liabilities		20			20
Lease liabilities, net of current portion		36			41
Total liabilities	$	56		$	61

Weighted-average remaining life	2.4 years			2.8 years
Weighted-average discount rate		12.3	%		12.3	%

Equipment
Right of use assets	$	56		$	66

Current portion of lease liabilities		33			37
Lease liabilities, net of current portion		23			29
Total liabilities	$	56		$	66

Weighted-average remaining life	1.7 years			2.0 years
Weighted-average discount rate		12.5	%

Great Elm Capital Group, Inc. 10-Q