Great Elm Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2023 (fiscal Q2 and first half of fiscal 2024). Great Elm is an alternative asset manager; it reported approximately $654.5 million of combined AUM at quarter-end. The filing presents the former durable medical equipment business as discontinued operations.
Financial results
| Metric | Three months ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 |
|---|---|---|
| Revenue | $2.8 million | $6.1 million |
| Operating loss | $2.7 million | $4.1 million |
| Net income (loss) attributable to Great Elm | $(0.35) million | $2.4 million |
| Basic EPS | $(0.01) | $0.08 |
| Operating margin | Approximately (96)% | Approximately (68)% |
- Revenue increased 50% for the quarter and 64% for the six-month period versus prior-year periods, primarily due to incentive and other fees from Great Elm Capital Corp. (GECC). Six-month incentive fee revenue was $2.0 million.
- Quarterly operating costs rose to $5.5 million from $4.7 million; six-month costs rose to $10.3 million from $8.5 million. Management cited compensation, added personnel, and professional fees tied to strategic initiatives.
- Other income was $3.5 million for the quarter and $8.8 million for six months, including investment gains and dividends/interest. This was substantially below prior-year other income, which included Forest-related gains and a $10.5 million gain on sale of a controlling interest.
- Six-month net income from continuing operations was $2.5 million, versus $20.2 million a year earlier. The prior-year period also included $1.0 million of discontinued-operations income; the current period included $16,000.
- Cash and cash equivalents were $39.1 million at December 31, 2023, down from $60.2 million at June 30, 2023. Management also reported $29.7 million of marketable securities and GECC shares valued at $16.2 million.
- Operating cash flow from continuing operations was negative $19.9 million for the six months, versus negative $1.6 million a year earlier. Investing cash flow was negative $7.7 million; financing cash flow was positive $6.9 million, mainly from consolidated fund capital activity.
- At quarter-end, long-term debt had $26.9 million face value, consisting of 7.25% notes due 2027; convertible notes had $38.9 million principal, including interest paid in kind, and are due 2030 at 5%. The reported debt carrying values were $25.9 million and $38.1 million, respectively. The notes rank pari passu as described in the filing.
- Total assets were $146.2 million, total liabilities $71.6 million, and total stockholders’ equity $74.6 million. The company’s reported net consolidated debt-to-equity ratio was 0.40:1, below the 2:1 covenant threshold.
Changes, outlook, and risks
- Compared with the prior-year quarter, revenue improved, but attributable results shifted from $29.5 million income to a $0.35 million loss. Prior-year results benefited from Forest-sale and investment-related gains; current-period results were affected by much smaller investment gains.
- The company completed two build-to-suit real estate projects in Mississippi and Florida only in development during the period. Lease commencement was expected by the second calendar quarter of 2024, and the company intended to sell the properties near commencement.
- Management stated it had no unfunded binding commitments to make additional investments and believed available liquidity was sufficient for obligations over at least the next 12 months. No quantitative earnings or revenue guidance was provided.
- Key stated risks include managed-fund performance and distributions, ability to grow or sell real estate developments profitably, capital-raising and market conditions (including interest rates and inflation), competition, personnel retention, regulatory compliance, cybersecurity, and litigation. The filing reported no material change in previously disclosed risk factors and no litigation expected to materially affect the company.
- A contingent payment tied to Monomoy UpREIT fee revenue was estimated at $1.0 million and recorded as a current related-party payable. The filing also disclosed related-party convertible notes and shared-services arrangements.
- Management concluded disclosure controls were effective as of December 31, 2023; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether recurring management fees and incentive fees can grow enough to cover operating expenses, given continuing operating losses and negative operating cash flow.
- The composition, liquidity, and valuation of investments and marketable securities, including GECC exposure and fund investments valued using NAV.
- Cash-flow drivers and the distinction between company cash and cash held by consolidated funds; confirm the timing of expected real estate project completion and sales.
- Debt-service capacity, future cash-versus-in-kind interest choices on convertible notes, potential dilution from conversion, and continued compliance with the 2:1 debt covenant.
- Whether management’s 12-month liquidity assessment remains supportable if investment values, managed-fund distributions, or property-sale proceeds weaken.