Great Elm Group, Inc. — FY2023 Form 10-K
Period: Fiscal year ended June 30, 2023, compared with fiscal 2022. This is an annual report, not a report for calendar 2022 Q4.
Business context
Great Elm is an alternative asset manager focused on credit, real estate, specialty finance and other strategies. Its managed vehicles included Great Elm Capital Corp. (GECC) and Monomoy UpREIT; combined assets under management were approximately $639.8 million at June 30, 2023. The company held approximately 20.2% of GECC and 7.3% of Monomoy UpREIT.
During the year, Great Elm sold its Durable Medical Equipment business (HC LLC) to Quipt and sold its controlling and remaining interests in Forest to JPMorgan. It also began two build-to-suit real estate projects, with leases expected to commence by the first calendar quarter of 2024; management intends to sell the properties with leases at or near commencement.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Continuing-operations revenue | $8.7 million | $4.5 million |
| Operating loss | $(11.2) million | $(8.7) million |
| Net income (loss) from continuing operations | $14.5 million | $(19.3) million |
| Net income (loss) attributable to Great Elm | $27.7 million | $(14.9) million |
| Basic EPS | $0.95 | $(0.56) |
| Cash from continuing operating activities | $(3.1) million | $17.1 million |
Revenue rose 92%, mainly reflecting a full year of Monomoy UpREIT management fees and $1.0 million of GECC incentive fees. Continuing-operations operating expenses increased to $19.9 million from $13.3 million, so the operating loss widened despite revenue growth. The return to profit was principally associated with investment gains and divestitures: other income included $10.5 million gain on the Forest controlling-interest sale, $24.4 million gain on the retained Forest investment, and $6.2 million of dividends and interest, partially offset by $9.2 million of net realized and unrealized investment losses excluding the Forest investment.
Discontinued operations contributed $13.2 million of net income in FY2023, including a $13.3 million disposal gain. DME net revenue was $33.4 million through its January 3, 2023 sale, versus $63.5 million in FY2022; these figures are not directly comparable because the business was sold partway through FY2023.
At June 30, 2023, cash was $60.2 million, short-term marketable securities were $24.6 million, and investments at fair value were $32.6 million. Working capital was $115.8 million, compared with $64.7 million a year earlier. Total current assets were $123.1 million and current liabilities $7.4 million. Management said liquidity was sufficient for obligations for at least 12 months, but warned that executing its growth strategy may require using liquid resources, issuing equity or incurring debt, and that inability to raise capital could impede the plan.
Debt included $26.9 million principal of 7.25% notes due June 2027 and $37.9 million principal of 5.0% convertible notes due February 2030, including interest paid in kind. The notes’ carrying values were $25.8 million and $37.1 million, respectively. The company reported a net consolidated debt-to-equity ratio of 0.07:1 at June 30, 2023. The 2027 notes restrict additional debt and dividends if the ratio exceeds 2:1 and include a cash-retention covenant if that threshold is exceeded at quarter-end. No federal income tax expense was recorded; state and local tax expense was $0.2 million.
Changes, outlook and key risks
- The Forest sale removed Forest from Great Elm’s consolidated tax group; federal NOL carryforwards fell from approximately $821 million at June 30, 2022 to $16.2 million at June 30, 2023. Approximately $8.2 million of the remaining federal NOLs expire in fiscal 2024–2025; $8.0 million carry forward indefinitely. A full valuation allowance was recorded for deferred tax assets in excess of deferred tax liabilities.
- The HC LLC sale had stated consideration of $80.0 million, including cash, assumed debt and Quipt shares. Great Elm reported $64.1 million of cash proceeds after transaction costs, non-controlling-interest distributions and escrow, subject to working-capital adjustments. It recorded a subsequent $0.3 million loss from finalizing those adjustments.
- Monomoy UpREIT management fees are a significant revenue source. Investment management agreements may be terminated by counterparties, and fee revenue depends on assets, rents and investment performance. Management reported $2.3 million of unfunded binding investment commitments as of the report date.
- Principal risks include market and interest-rate volatility, investment valuation losses, competition, difficulty raising capital, dependence on key personnel and managed-fund relationships, acquisition and integration risks, regulatory and cybersecurity risks, and possible limits on tax-attribute use following ownership changes. Convertible-note conversion could dilute common shareholders.
- Great Elm said it does not currently intend to pay common-stock dividends. The financial statements received an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting. The auditor identified tax treatment of gains on certain divestitures as a critical audit matter.
Important facts for investors to verify
- How much recurring fee revenue and cash generation the continuing asset-management business can produce after the DME and Forest divestitures; FY2023 operating cash flow was negative.
- The sustainability of GECC incentive fees and the performance, redemption terms and valuation of Monomoy UpREIT and other investments.
- Final HC LLC sale adjustments, escrow and remaining distributions to non-controlling interests, and any subsequent cash effects.
- Convertible-note terms, related-party holdings, potential dilution and the company’s capacity to service both debt issues while funding growth.
- Use and potential limitations of remaining NOLs, including the near-term expirations and the ownership restrictions designed to preserve tax attributes.
- Completion, leasing and planned sale economics of the two build-to-suit projects, and whether management’s stated 12-month liquidity assessment remains valid.