Great Elm Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter and nine months ended March 31, 2021, not 2020 Q3. Dollar amounts below are in millions unless noted. Great Elm operates durable medical equipment (DME), investment management, and real estate businesses. On December 29, 2020, it completed a holding-company reorganization and changed its ticker from GEC to GEG.
Financial performance and position
- Revenue: Q3 revenue was $15.1 million, down 7% from $16.2 million. Nine-month revenue was $48.4 million, approximately flat year over year. Q3 DME revenue fell to $13.1 million from $14.1 million; investment management revenue declined to $0.7 million from $0.8 million; real estate revenue was unchanged at $1.3 million.
- Profit and loss: Q3 operating loss was $0.4 million versus $1.0 million. Net loss was $2.9 million, or $0.11 per share, compared with $11.9 million, or $0.46 per share. Nine-month net loss was $7.7 million versus $17.2 million. The improved comparisons mainly reflect smaller losses on Great Elm’s GECC investment, not a return to profitability.
- Cash flow: Nine-month operating cash flow was negative $21.2 million, compared with positive $4.6 million a year earlier. Investing cash flow was negative $13.4 million and financing cash flow positive $18.5 million. Cash, cash equivalents, and restricted cash decreased by $16.1 million to $25.3 million.
- Liquidity and assets: At March 31, cash and cash equivalents were $24.3 million, restricted cash $1.0 million, and the publicly traded GECC investment $18.8 million. Total assets were $215.3 million; current assets were $83.3 million and current liabilities $35.5 million. Current assets and liabilities include consolidated investment-fund balances.
- Debt and preferred claims: Outstanding principal included $33.5 million of convertible notes, $48.3 million of real-estate senior debt, $4.3 million of subordinated real-estate debt, and $2.2 million of equipment-financing debt. The DME revolver was undrawn. The Corbel term loan was repaid in December 2020. Separately, subsidiary preferred stock included $35.0 million face value of Forest preferred stock and preferred interests issued in connection with the DME financing; these instruments carry 9% dividends and are classified as liabilities.
- Margins and segments: The filing does not present a consolidated gross-margin percentage. DME management cited a mix shift away from higher-margin sleep studies toward lower-margin equipment and supplies sales; lower rental setup activity also affected the business. Investment management reported a $0.3 million pretax loss for Q3, while real estate reported $0.1 million of pretax income.
Material changes and unusual items
- JPM-affiliated financing transactions provided $37.7 million of gross proceeds, including 9% preferred stock and a 20% interest in Forest sold to JPM. Proceeds helped fund repayment of the Corbel facility. The new structure adds preferred claims and related dividend costs.
- Great Elm acquired Advanced Medical DME and PM Sleep Lab on March 1, 2021 for stated consideration of $1.1 million, including contingent consideration. The acquired businesses operate in Kansas and Missouri; the company cited expected integration synergies.
- The company claimed $2.5 million of Employee Retention Credits during the quarter, including $2.3 million recorded as a reduction to operating expenses. This materially benefited reported operating costs.
- The quarter included a $4.8 million fair-value charge in the DME segment related to the Series A-2 preferred-stock sale participation feature, offset by an equal benefit in general corporate activity and eliminated in consolidation. The Corbel loan repayment generated a $1.9 million extinguishment loss during the nine-month period.
- The company holds 5,539,724 GECC shares, approximately 23.6% of GECC, and recorded a $1.1 million Q3 unrealized loss on that investment. Nine-month unrealized loss was $0.5 million, versus $11.6 million in the prior-year period.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance is provided. Management expects near-term DME rental revenue pressure because of fewer patient setups and a suppressed referral pipeline. It also describes continuing pandemic effects on sleep studies, managed-portfolio assets, and potential acquisitions; duration and overall impact remain uncertain.
- Management says executing its growth plan may require additional capital and that it may be unable to execute the plan if it cannot raise debt or equity financing. Its stated strategy is to pursue acquisitions and investments, but it reports no binding commitments for additional transactions.
- CMS accelerated payments of $4.4 million received in fiscal 2020 are included in deferred revenue and were expected to begin recoupment against future Medicare and Medicaid claims in fiscal Q4 2021. DME also received $3.6 million in PPP loans and had applied for full forgiveness; the filing notes eligibility uncertainty. The company says it will continue to monitor eligibility for ERCs through the quarter ending June 30, 2021.
- Key exposures include reliance on GECC for investment-management revenue, a single tenant for real-estate rental revenue, and third-party payors for DME revenue. The real-estate property is fully leased to Gartner through March 2030, but rent rights are assigned to lenders while related borrowings remain outstanding.
- The DME business is subject to credit-facility covenants and payor reimbursement estimates. The real-estate subordinated note bears 15% interest, which is capitalized. The Series A-2 preferred stock entitles its holder, upon a DME business sale, to the greater of liquidation preference or 33% of sale proceeds.
- The company reported no material change in previously disclosed risk factors, no material litigation expected to adversely affect it, and effective disclosure controls as of March 31, 2021.
Most important facts for investors to verify
- Whether DME patient referrals, equipment setups, rental revenue, and payor collections recover—and how revenue reserves evolve.
- Cash runway and funding needs, including operating cash use, consolidated-fund investment activity, and any margin borrowing due to brokers.
- The full economic and cash cost of the 9% preferred instruments, their redemption terms, and the potential DME sale participation claim.
- Status of PPP loan forgiveness, CMS advance-payment recoupments, and continued ERC eligibility or related adjustments.
- Performance of the AMPM acquisition and whether anticipated integration benefits materialize.
- Convertible-note dilution: the notes have $33.5 million face value and potential conversion shares; the filing excludes potential shares from diluted loss per share as antidilutive.