Great Elm Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2022, compared with fiscal 2021. Although the request metadata says “2021 Q4,” this filing covers fiscal 2022, not a quarter.
Business context
Great Elm is a holding company with two operating segments: durable medical equipment (DME) and investment management. It reported approximately $607 million of assets under management at June 30, 2022. The company acquired the Monomoy REIT management agreement in May 2022 and MedOne’s power-mobility assets in August 2021. Its Fort Myers real estate business was sold in June 2021 and is reported as discontinued operations.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $68.0 million | $60.9 million |
| Operating loss | $4.1 million | $3.7 million |
| Loss from continuing operations | $15.0 million | $8.5 million |
| Net loss attributable to Great Elm | $14.9 million | $7.3 million |
| Net loss per share | $0.56 | $0.28 |
| Operating cash flow | $29.3 million provided | $19.0 million used |
| Investing cash flow | $40.0 million used | $15.5 million used |
| Financing cash flow | $10.0 million provided | $18.3 million provided |
- Revenue increased 12%. DME generated $63.5 million, up 10%; investment management generated $4.5 million, up 41%.
- DME operating income was $4.2 million, versus $2.6 million. Investment management recorded an operating loss of $2.8 million, versus $0.8 million.
- Consolidated operating margin was approximately negative 6.0%, compared with negative 6.1%. Net losses widened, primarily reflecting investment losses, higher interest expense, and increased costs.
- Operating cash flow benefited substantially from investment activity in consolidated funds, including $23.2 million of net investment sales. It should not be read as a measure of recurring operating cash generation alone.
- Cash was $23.6 million and investments were $48.0 million at year-end. Working capital was $64.7 million, versus $55.5 million.
- Reported liabilities totaled $125.8 million. Major financing included $26.9 million face value of 7.25% notes due 2027, $36.1 million face value of 5% convertible notes due 2030, $6.3 million seller-note principal due in 2023, and $35.0 million face value of 9% Forest preferred stock. The filing also reports $38.1 million face value of HC LLC preferred stock, largely eliminated in consolidation; $0.8 million remained held by outside related parties.
- The $10 million DME revolving facility was undrawn at year-end and scheduled to mature November 29, 2022. The company reported compliance with material covenants at June 30, 2022.
Changes, outlook, and material risks
- Revenue growth reflected acquisitions, improved revenue reserves and higher GECC-related assets under management. Operating expenses rose 12%, faster than revenue, including increased investment-management costs and acquisition-related expenses.
- Investment results deteriorated: the company recorded $7.6 million in net realized and unrealized investment losses, compared with a $0.2 million gain in 2021; consolidated-fund investment results were also negative. Investment management segment other expense included $7.8 million of net investment losses.
- DME demand recovered from pandemic-related weakness, but Philips Respironics’ device recall and broader supply-chain constraints limited PAP/CPAP equipment availability, created a patient backlog and caused missed revenue opportunities. Management expected some missed opportunities to continue in the near term; it provided no quantified earnings or revenue guidance.
- Employee retention credits recognized were $2.4 million in FY2022, versus $4.8 million in FY2021. The company reported approximately $821 million of federal NOL carryforwards, but recorded a $207.1 million valuation allowance against deferred tax assets and cautioned that ownership changes could limit NOL use.
- Key risks include Medicare and other payor reimbursement changes, complex claims and audit requirements, supplier concentration, the Philips recall, dependence on cancellable investment-management agreements and GECC, investment-value volatility, financing and refinancing needs, potential dilution from convertible notes and equity issuance, and regulatory, cyber, economic and acquisition-integration risks.
- The filing reports no material pending or threatened litigation expected to adversely affect the company. The financial statement audit opinion was unqualified. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Whether DME equipment supply and patient backlog improved after year-end, and the continuing effect of the Philips recall.
- How much operating cash flow reflects repeatable business operations versus sales and purchases of investments by consolidated funds.
- Current liquidity, repayment or refinancing of the DME revolver that matured after the reporting date, and the terms and funding plan for the seller note due in 2023.
- Investment values and concentration, including the GECC position, and the performance and retention prospects of the GECC and Monomoy management agreements.
- Potential dilution and restrictions associated with convertible notes, equity consideration and the company’s tax-attribute ownership limits; also verify the usable amount and expiration schedule of NOLs.