Great Elm Group, Inc. — Form 10-K summary
Business context and reporting period. This is Great Elm Group’s annual report for the fiscal year ended June 30, 2021, with comparative fiscal 2020 results. The filing metadata says “2020 Q4,” but the document is a FY2021 10-K; it also includes unaudited quarterly results, including Q4 FY2021. Great Elm is a holding company with durable medical equipment (DME) and investment management segments; real estate was sold and reported as discontinued operations.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $60.9 million | $59.0 million |
| Operating loss | $3.7 million | $2.2 million |
| Loss from continuing operations | $9.3 million | $13.3 million |
| Net loss attributable to Great Elm | $8.1 million; $0.31 per share | $13.0 million; $0.51 per share |
| Cash from (used in) operating activities | $(19.0) million | $13.2 million |
| Cash from (used in) investing activities | $(15.5) million | $(6.6) million |
| Cash from financing activities | $18.3 million | $21.8 million |
Revenue increased about 3%. Operating margin was approximately negative 6.1% (versus negative 3.7% in FY2020). DME generated $57.6 million of revenue and $2.6 million of operating income, compared with $55.7 million and $3.5 million. Investment management revenue was $3.2 million, down from $3.3 million; its segment reported $2.7 million of pretax income, largely reflecting investment gains and dividends rather than fee revenue alone.
DME sales and services revenue rose to $37.5 million from $34.2 million, while rental revenue fell to $20.2 million from $21.4 million. Management attributed growth to the AMPM acquisition and resupply sales, partly offset by weaker rental setups and referral activity. Consolidated cash from operations declined principally amid investment purchases by consolidated funds and a net loss. The filing does not provide a single consolidated gross-margin measure.
Liquidity, debt, and capital
- At June 30, 2021, cash was $24.4 million, investments at fair value were $24.0 million, current assets were $88.5 million, current liabilities were $33.0 million, and working capital was $55.5 million.
- Convertible Notes had $34.3 million face value outstanding, accrued interest at 5%, and mature in 2030. Their conversion price is $3.4722 per share; conversion could dilute existing shareholders.
- Subsidiary preferred stock was mandatorily redeemable and carried 9% dividends. The balance sheet reported $35.5 million of redeemable subsidiary preferred stock; the disclosed face values include $35.0 million held by JPM and $2.0 million held by Corbel and VHG. The DME Series A-2 instrument also provides its holder a potential share of sale proceeds.
- Equipment financing debt was $2.0 million. The $10 million DME revolver was undrawn at year-end and matures in November 2022; the company reported covenant compliance. Lease liabilities totaled approximately $5.5 million.
- Management said acquisitions may require use of liquid resources and additional equity or debt financing. The company does not currently intend to pay common dividends.
Material changes and unusual items
- Great Elm completed a holding-company reorganization and a $37.7 million JPM financing transaction in December 2020. The financing included 9% preferred stock and a sale of 20% of Forest common stock to JPM; proceeds helped repay the Corbel term loan.
- The company acquired AMPM in March 2021 for initial consideration of approximately $1.1 million, with up to $2.1 million of contingent consideration; it contributed about $1.5 million of DME revenue through year-end.
- Great Elm sold its Fort Myers real estate business in June 2021 for $4.6 million cash and recorded a $0.3 million gain after costs. It subsequently invested the proceeds in Monomoy Fund, a private industrial real estate fund.
- FY2021 included $4.8 million of CARES Act benefits, principally employee-retention credits; FY2020 included $5.1 million of stimulus, including a $3.6 million PPP loan, whose forgiveness was approved in FY2021. The filing also reports $2.8 million of claimed employee-retention credits expected to be settled after year-end.
- A $1.9 million loss on extinguishment of debt followed repayment of the Corbel facility. Other investment income improved year over year, including dividends and investment gains, while FY2020 had substantial unrealized investment losses.
- Federal NOL carryforwards were approximately $952 million, but Great Elm maintained a $231.8 million valuation allowance against deferred tax assets. The company cautions that ownership changes can limit NOL use; ownership restrictions and a tax rights plan generally apply around the 4.99% threshold.
Outlook, commentary, and risks
Management’s stated strategy is to build a diversified holding company through acquisitions, investment management, and periodic review of asset retention or disposition. It provided no quantitative financial guidance. COVID-19 continued to weigh on sleep studies, patient referrals, DME setups, and investment-management assets under management; management said the duration and ultimate effects remained uncertain.
- Philips Respironics recall and supply: A June 2021 voluntary recall affected certain PAP and ventilator devices distributed by the DME business. Philips paused sales of affected equipment, creating supply constraints. Great Elm warned that a prolonged shortage could limit patient service and revenue and that legal or regulatory exposure could arise.
- Healthcare reimbursement and compliance: DME depends significantly on Medicare and other payors. Reimbursement changes, audits, collection delays, competitive bidding, and fraud-and-abuse compliance risks could adversely affect results. The company had $3.5 million remaining in CMS advance payments after $0.9 million was recouped in FY2021.
- Supplier concentration and pandemic: Reliance on single-source or limited suppliers and continuing COVID-related effects could disrupt equipment availability, referrals, or operations.
- Investment management: Fee revenue depends on assets under management and performance; investment management agreements may be terminated. The company reported $9.7 million of earned incentive fees that remained constrained and unrecognized.
- Capital, valuation, and governance: Acquisition execution, access to capital, debt service, potential dilution, related-party transactions, and the ability to realize NOL benefits are significant uncertainties. Great Elm reported no material pending litigation expected to have a material adverse effect. Management concluded internal control over financial reporting was effective; the external auditor did not audit or opine on that conclusion.
Most important facts for investors to verify
- Whether DME referral activity, rental revenue, margins, and patient setups recover, and the financial and legal effects of the Philips recall.
- Current liquidity and cash burn, including how much operating cash flow reflects consolidated-fund investment activity versus operating needs.
- The full terms, dividend burden, redemption conditions, covenants, and potential sale participation of subsidiary preferred stock, alongside convertible-note dilution.
- Whether the AMPM acquisition achieves its expected contribution and whether contingent consideration becomes payable.
- The usability and expiration profile of federal NOLs, Section 382 ownership limitations, and the basis for the deferred-tax valuation allowance.
- Whether constrained incentive fees are collected and whether investment-management agreements and assets under management are retained or grow.