Great Elm Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2022, the company’s fiscal third quarter, with nine-month results compared with the periods ended March 31, 2021. Although the request metadata says “2021 Q3,” the filing itself reports fiscal 2022 Q3. Unless noted otherwise, amounts below are in millions of dollars.
Business context
Great Elm is a holding company with two operating segments: durable medical equipment (DME) and investment management. DME distributes and rents respiratory-care equipment and provides sleep-study services. Investment management primarily manages Great Elm Capital Corp. (GECC) and private funds. The company reported approximately $224.3 million of assets under management at March 31, 2022. Its former real estate operating business was sold in June 2021 and is presented as discontinued operations in prior-period comparisons.
Financial performance and position
| Metric | Three months ended March 31, 2022 | Prior-year quarter | Nine months ended March 31, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $16.6 | $13.8 | $49.9 | $44.5 |
| Operating loss | $(1.9) | $(1.1) | $(2.8) | $(4.2) |
| Net loss | $(6.1) | $(2.7) | $(10.2) | $(7.2) |
| Net loss attributable to Great Elm | $(5.9) | $(2.6) | $(10.3) | $(6.4) |
| Loss per share | $(0.22) | $(0.10) | $(0.38) | $(0.25) |
- Quarterly revenue increased 20%; nine-month revenue increased 12%. Growth was primarily from DME, including acquisitions, and higher investment-management fees.
- Operating margin, calculated from reported figures, was approximately negative 11.7% for the quarter versus negative 7.9% a year earlier, and negative 5.6% for nine months versus negative 9.4%. The quarterly operating loss widened as expenses grew faster than revenue.
- Quarterly investment-management revenue was $1.0 million, up from $0.7 million; nine-month revenue was $3.0 million, up from $2.3 million. DME revenue was $15.6 million for the quarter and $46.9 million for nine months.
- Investment marks weighed on results: net realized and unrealized investment losses were $3.2 million for the quarter and $5.1 million for nine months, compared with losses of $1.1 million and $0.5 million, respectively, in the comparable periods. The filing attributes much of this activity to GECC and managed-fund investments.
- Cash from continuing operating activities was $15.4 million for nine months, compared with cash used of $23.1 million a year earlier. The current-period inflow was substantially influenced by $24.5 million of investment sales by consolidated funds; it should not be read as recurring operating cash generation. Investing activities used $4.5 million and financing activities used $12.5 million. Cash declined $1.6 million to $22.7 million.
- At March 31, cash was $22.7 million and total assets were $137.5 million, down from $161.9 million at June 30, 2021. Current assets were $65.6 million and current liabilities were $17.6 million; consolidated fund assets and obligations are included in these totals.
- Debt and financing included convertible notes with $35.2 million face value ($34.3 million carrying value), $35.7 million of redeemable subsidiary preferred stock on the balance sheet (aggregate face value reported as $37.0 million), and $2.7 million of equipment financing. Lease liabilities were $4.3 million. The $10 million DME revolving facility was undrawn; it matures November 29, 2022.
Changes versus prior comparable periods
- Revenue growth reflected the AMPM acquisition (March 2021), MedOne acquisition (August 2021), improved revenue reserves, and higher average managed assets. Management said DME demand had improved from earlier pandemic periods, but remained affected by supply constraints.
- Operating costs rose $3.6 million in the quarter and $4.0 million for nine months. Drivers included acquisition-related DME costs and higher investment-management compensation and consulting costs.
- The company recorded larger investment losses than in the prior-year periods. Nine-month interest expense also increased, largely because of interest on preferred stock issued in the December 2020 financing.
- Prior-year comparisons include Employee Retention Credit benefits of $2.3 million in the quarter and $2.3 million for nine months. Current-year nine-month results included $2.4 million of credits; none were recorded in the current quarter.
- The company adopted the convertible-instrument accounting standard (ASU 2020-06) on July 1, 2021 using retrospective application, adjusting prior-period presentation of convertible debt, interest expense, and equity.
Outlook, risks, contingencies, and unusual items
- Management expects global supply-chain challenges, especially shortages affecting positive-airway-pressure devices, to continue in the near term and result in some missed revenue opportunities. The filing says the duration and ultimate effect of pandemic-related disruptions cannot be estimated clearly.
- Management said it may use all available liquid financial resources for acquisitions or investments and may need additional debt or equity capital to execute its growth strategy. It stated that failure to raise capital could impair execution of that strategy. No quantified earnings or revenue guidance was provided.
- Other identified risks include dependence on GECC and its dividend and managed assets, payor reimbursement and collections, acquisition execution, financing access, interest-rate and inflation volatility, and competition. Government payors represented 33% of quarterly revenue and 35% of nine-month revenue; investment-management receivables and revenue were concentrated in managed investment products, primarily GECC.
- On May 4, 2022, after quarter-end, GECM agreed to acquire the Monomoy REIT investment-management agreement and related assets from ICAM. The $10 million upfront price was to be financed using newly issued GEG shares, GEG-held GECC shares, and a promissory note. Up to $2 million of earnout consideration may be payable, and the transaction requires a $15 million equity investment in Monomoy REIT. The filing describes ICAM relationships with the company’s executive chairman and reports approval by independent directors.
- The company disclosed no material change in previously reported risk factors, no material pending litigation expected to adversely affect it, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of March 31, 2022.
Important facts for investors to verify
- Whether DME device availability and patient referrals recover, and how supply constraints affect sales, rentals, margins, and cash collection.
- How much operating cash flow is repeatable after separating consolidated-fund investment trading and working-capital movements from core business activity.
- The terms, cash-interest burden, maturity and covenant implications of convertible notes, preferred stock, equipment financing, and the revolving facility nearing maturity.
- The fair value and dividend performance of GECC and other investments, given their impact on reported earnings and investment-management economics.
- The final financing, required $15 million investment, related-party safeguards, and performance outcomes of the post-quarter Monomoy transaction.