Great Elm Group, Inc. quarterly report, Q2 FY2021

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Great Elm Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended December 31, 2020. This is the company’s fiscal 2021 second quarter, despite the request metadata describing it as 2020 Q2. Amounts are in U.S. dollars; financial-statement amounts are generally in thousands unless stated otherwise.

Business context

Great Elm is a holding company with durable medical equipment (DME), investment management, and real estate businesses. On December 29, 2020, it completed a holding-company reorganization: Great Elm Capital Group, Inc. became Forest Investments, Inc., and shareholders’ shares converted into Great Elm Group shares (Nasdaq: GEG). The filing presents the reorganization as intended to be tax-free for U.S. federal income-tax purposes.

Financial performance and liquidity

  • Quarter revenue: $16.6 million, essentially unchanged from $16.6 million in the prior-year quarter. Operating loss was $1.2 million versus $0.3 million; net loss was $0.9 million versus $2.0 million. Loss attributable to Great Elm was $0.35 million, or $0.01 per share, compared with $1.84 million, or $0.07 per share.
  • Six-month revenue: $33.2 million, up 4% from $31.9 million. Operating loss was $1.6 million versus $1.1 million; net loss was $4.8 million versus $5.3 million. Loss attributable to Great Elm was $4.1 million, or $0.16 per share, versus $4.9 million, or $0.19 per share.
  • Revenue mix and trends: For the quarter, DME sales and services revenue rose to $9.5 million from $9.0 million, while DME rental income declined to $5.0 million from $5.3 million. Investment management revenue fell to $0.76 million from $0.89 million; real estate rental income was broadly flat at $1.28 million. Six-month growth was led by DME sales and services, partially offset by lower DME rentals and investment management fees.
  • Margins and unusual income items: The quarter’s operating loss widened as operating costs rose faster than revenue. Other income included a $2.6 million unrealized gain on Great Elm’s GECC investment in the quarter; the six-month unrealized gain was $0.7 million. The quarter also included a $1.9 million loss on extinguishment of debt. These items affected reported results and should be distinguished from operating performance.
  • Cash flow: Operating activities used $1.7 million in the six months, compared with $3.1 million provided a year earlier. Investing activities used $11.4 million, primarily for an $8.8 million GECC rights-offering investment and $3.1 million of rental equipment purchases. Financing activities provided $5.6 million, including JPM transaction proceeds and new equipment financing, partly offset by debt repayment and issuance costs. Cash, cash equivalents and restricted cash declined $7.5 million to $33.8 million.
  • Liquidity: Unrestricted cash was $32.9 million at December 31, 2020, down from $40.5 million at June 30. The company also held GECC shares valued at $19.5 million. Current assets were $67.9 million and current liabilities $20.7 million.
  • Debt and preferred securities: At period end, principal included $54.8 million of other borrowings, $3.1 million of related-party notes, and $31.3 million face value of convertible notes. The convertible notes bear 5% interest, mature in 2030, and are convertible into common stock. A $10 million DME revolver was undrawn. JPM provided $37.7 million of financing through $35.0 million of 9% Forest preferred stock and a $2.7 million purchase of Forest common stock; proceeds helped repay the Corbel term loan. Subsidiary preferred stock carries 9% dividends and is generally mandatorily redeemable in 2027. The DME Series A-2 preferred stock also provides for a potential 33% share of DME sale proceeds.

Material changes versus the prior comparable period

  • For the quarter, revenue was nearly flat, but operating costs increased and operating loss widened. In the six-month comparison, revenue increased 4%, while the operating loss also widened.
  • DME equipment and resupply sales increased, but sleep-study services and rental revenue were pressured by reduced patient referrals and set-ups. Lower sleep-study contribution also weighed on sales-and-services margins; rental margins benefited from lower capital expenditures for new set-ups.
  • Investment management fees declined with lower average managed assets. The company reported $228.1 million of combined assets under management across its managed vehicles at December 31, 2020.
  • The JPM financing and Corbel payoff materially changed the capital structure. The Corbel facility, with approximately $25.1 million outstanding at June 30, was repaid on December 29, 2020, generating the reported debt-extinguishment loss.

Outlook, risks and contingencies

  • Management said COVID-19 continued to suppress DME referrals and sleep-study activity and reduced managed portfolio assets compared with pre-pandemic levels. It expected near-term declines in DME rental revenue due to fewer new patient set-ups and said the pandemic’s duration and ultimate impact could not be estimated.
  • The company reported added DME costs related to COVID-19 absences, cleaning, and remote patient set-ups. It also identified risks to investment values, acquisitions, and business opportunities.
  • Great Elm is seeking acquisitions and investments but reported no binding commitments at the filing date. Management said execution of its growth plan may depend on raising additional debt or equity capital.
  • DME received $4.4 million of CMS advance payments in fiscal 2020; recoupment against future Medicare and Medicaid claims was due to begin in fiscal 2021’s fourth quarter. A $3.6 million PPP loan forgiveness application was pending; the filing notes eligibility risk. DME also received $1.4 million in HHS grants and said it would continue monitoring compliance with grant conditions.
  • Concentration risks include investment-management revenue and receivables tied to GECC, real estate rent from a single tenant, and DME revenue dependent on third-party payors. Management reported no expected material adverse impact from pending or threatened litigation and no material changes to the risk factors in its prior Form 10-K.
  • Other disclosed risks include potential LIBOR transition effects on certain notes, debt covenants, and the possibility that future results differ materially from forward-looking statements. No formal financial guidance was provided.

Important facts for investors to verify

  1. Whether COVID-related referral declines and DME rental pressure persist, and how they affect revenue, margins, and cash generation.
  2. The quality and durability of earnings apart from GECC mark-to-market gains, dividends, and the debt-extinguishment charge.
  3. The terms, cash cost, redemption obligations, and potential sale-proceeds participation associated with the 9% preferred securities, alongside convertible-note dilution and debt maturities.
  4. The company’s liquidity needs and access to capital if operating cash flow remains negative while it pursues acquisitions and investments.
  5. Progress on PPP loan forgiveness, CMS advance-payment recoupment, payor revenue reserves, and compliance with subsidiary debt and preferred-stock covenants.
  6. GECC investment valuation and concentration, incentive fees earned but not recognized ($9.2 million), and the single-tenant exposure of the real estate business.