Great Elm Group, Inc. — Form 10-Q Summary
Business context and reporting period. This is the unaudited fiscal first quarter ended September 30, 2021, compared with the three months ended September 30, 2020. Great Elm operates durable medical equipment (DME) and investment management businesses, with general corporate activities. The company sold its real estate business in June 2021; prior-period results present it as discontinued operations.
Financial results and position
| Metric | Quarter ended Sept. 30, 2021 | Prior-year quarter |
|---|---|---|
| Total revenue | $16.5 million | $15.4 million |
| Operating income (loss) | $1.0 million | $(1.1) million |
| Operating margin | 6.1% | (7.5)% |
| Income (loss) from continuing operations | $106,000 | $(3.8) million |
| Net income (loss) attributable to Great Elm | $(200,000) | $(3.6) million |
| Cash flow from operations | $(1.0) million | $1.7 million, including discontinued operations |
- Revenue grew 8% year over year. DME revenue was $15.6 million, up 6%; investment management revenue was $983,000, up 27%.
- Consolidated operating expenses declined to $15.5 million from $16.5 million. The quarter included approximately $2.4 million of Employee Retention Credits (ERCs), a significant benefit to reported costs.
- Cash and cash equivalents were $21.8 million at September 30, down from $24.4 million at June 30. Operating, investing and financing cash flows were $(1.0) million, $(3.2) million and $1.6 million, respectively.
- Total assets were $161.1 million and total liabilities were $104.5 million. Current assets of $86.6 million exceeded current liabilities of $31.0 million; current assets include investments and assets of consolidated funds.
- Debt and preferred financing included $34.3 million face value of convertible notes, $3.0 million of equipment financing, and $37.0 million face value of externally held subsidiary preferred stock. The $10 million DME revolving facility was undrawn. The company reported compliance with material covenants.
- Great Elm held GECC shares valued at $19.1 million. Combined assets under management were approximately $291.9 million.
Material changes versus the prior-year quarter
- Results improved substantially from a $3.7 million consolidated net loss to $106,000 of net income; however, non-controlling interests resulted in a $200,000 net loss attributable to Great Elm.
- Revenue growth reflected acquisitions of AMPM (March 2021) and MedOne (August 2021), plus organic growth in DME resupply sales. Rental revenue increased only slightly, as new patient referrals remained weak.
- Investment-related losses were smaller: the company reported a $14,000 net realized and unrealized investment loss, plus $189,000 of losses on consolidated-fund investments, versus a $1.9 million investment loss in the prior-year quarter.
- Interest expense rose to $1.4 million from $1.1 million, primarily reflecting interest on preferred stock issued in December 2020. The company adopted ASU 2020-06 using the full retrospective method; prior-period interest expense and loss per share were adjusted.
- MedOne was acquired for $2.0 million of total consideration, including contingent consideration; preliminary purchase accounting added $1.9 million of goodwill.
Outlook, commentary, risks and unusual items
- Management provided no numerical earnings or revenue guidance. It expects DME rental revenue to remain pressured in the near term by fewer patient setups and supply constraints.
- COVID-19 continued to suppress sleep-study referrals and DME setups and contributed to global supply-chain challenges, including shortages of PAP devices. The company said the duration and full effects remain uncertain.
- Management said it intends to pursue acquisitions and investments, but execution of its strategic growth plan may depend on raising additional debt or equity capital.
- The company claimed $2.4 million of ERCs during the quarter and reported $4.0 million of claimed credits unsettled at quarter-end, recorded in prepaid and other current assets. ERCs reduced operating costs and are a material factor in interpreting the quarter’s improvement.
- Investment management revenue depends substantially on GECC and managed-asset levels. Approximately $10.0 million of incentive fees had been earned under agreements but remained unrecognized because collection was subject to uncertainty and the fees were constrained.
- Other risks include payer reimbursement estimates and concentration, investment valuation changes, acquisition integration and contingent payments, financing obligations, and the company’s reliance on key personnel and third-party relationships. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported operating improvement is repeatable after excluding ERC benefits, and whether the unsettled ERC claims are collected.
- Whether referral volumes, PAP-device supply and DME rental trends improve, and how acquisitions contribute to organic growth and cash generation.
- Cash burn, capital needs and the terms, covenants and future servicing or redemption requirements of convertible notes and preferred stock.
- GECC investment value, managed assets and fee generation, including the conditions for recognizing the constrained incentive fees.
- Acquisition performance and potential contingent consideration payments, including those tied to MedOne and AMPM revenue targets.